-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DVMbuJJcdNdKjquaRrZXFgr/kfzC2o/56reiTYLq6G6PvZZq7/f39KKBIqZTF5wv I/2NYEf/pgPA1OhX2G3vZA== 0001019687-99-000366.txt : 19990630 0001019687-99-000366.hdr.sgml : 19990630 ACCESSION NUMBER: 0001019687-99-000366 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER LASER SYSTEMS INC CENTRAL INDEX KEY: 0000878543 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330476284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14013 FILM NUMBER: 99655535 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 7148590656 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92677 10-K 1 PREMIER LASER 10K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1999. |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to ____________. Commission file number 0-25242 PREMIER LASER SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0472684 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3 MORGAN, IRVINE, CALIFORNIA 92618 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 859-0656 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A Common Stock and Class B Warrants ----------------------------------------- (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act or 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No |_| Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the registrant's voting stock held by nonaffiliates was approximately $32,019,546 on June 25, 1999, based upon the closing sale price of such stock on June 25, 1999. Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of June 25, 1999: Class A Common Stock: 14,961,436 Shares Class E-1 Common Stock: 1,257,461 Shares Class E-2 Common Stock: 1,257,461 Shares DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference, and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933: None. PART I ITEM 1. BUSINESS. THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO PREMIER LASER SYSTEMS, INC. (THE "COMPANY" OR "PREMIER") THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND INCLUDE, WITHOUT LIMITATION, OUR EXPECTATIONS AND ESTIMATES AS TO OUR BUSINESS OPERATIONS, INCLUDING THE INTRODUCTION OF NEW PRODUCTS, AND FUTURE FINANCIAL PERFORMANCE, INCLUDING GROWTH IN REVENUES AND NET INCOME AND CASH FLOWS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS ANNUAL REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF OUR MANAGEMENT, WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK FACTORS DESCRIBED IN THIS ANNUAL REPORT. BUSINESS OVERVIEW Premier develops, manufactures and markets several lines of proprietary medical lasers, fiberoptic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. In addition, through EyeSys, we develop, manufacture and market diagnostic systems which provide ophthalmic practitioners with images of the shape and curvature of the human cornea. Premier's majority owned subsidiary, OIS, is engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. Premier commenced operations in August 1991 after acquiring substantially all of the assets of Pfizer Laser Systems, a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. In 1993, Premier acquired from Proclosure, Inc. technology, assets and proprietary rights relating to a laser system for tissue fusion, and completed its initial public offering of securities in 1994. In September 1997, Premier acquired EyeSys in exchange for cash and securities. Premier acquired a majority of the outstanding common stock of OIS in several transactions commencing in October 1997 and ending in February 1998. As of this date, Premier remains a majority shareholder of OIS. OIS held its annual shareholders' meeting on January 18, 1999. At that meeting, Premier's proposed slate of board of directors was elected. On March 7, 1999, Premier and OIS entered into a Letter Agreement under which Premier committed to undertake OIS' manufacturing operations. Premier has made a proposal to the OIS board of directors under which Premier would acquire the remaining shares of OIS not already owned by Premier. This proposal was rejected, but additional discussions for such a transaction may occur in the future. LASER BUSINESS Our lasers and related products use the controlled application of thermal, acoustic and optical energy to allow the physician or dentist to perform selected minimally invasive procedures which in some cases, compared to conventional techniques not involving the use of lasers, vaporize or sever tissue with minimal blood loss and scarring, increase patient comfort and reduce patient treatment time and treatment costs. We currently market certain of these lasers for dentistry, ophthalmology and surgery. In our laser business, we participate in three market segments: dentistry, ophthalmology and surgery. Some of our innovations include: 2 o the first laser cleared for use on hard tissue (teeth) in dentistry o the first diode laser in dentistry o the first laser in clinical trials for cataract removal o the first Erbium:YAG laser for smoothing of skin o the first laser in clinical trials for tissue melding Although we have received more than 100 clearances from the FDA in multiple specialty areas to market our laser products for a variety of medical applications, due to limited financial resources we have initially focused our marketing efforts on dental lasers which we believe have the most promise for commercial success. We initiated marketing efforts in ophthalmology in 1997. As resources permit, we plan to commence marketing efforts with respect to other medical applications which we believe may also be commercially viable. CORNEAL TOPOGRAPHY BUSINESS EyeSys designs, develops and markets a line of noninvasive diagnostic imaging systems for use by ophthalmologists and optometrists in surgical planning and evaluation, diagnosis of corneal diseases and contact lens fitting. Founded in 1986, EyeSys has installed more than 3,500 systems. The EyeSys System 2000 and Vista products each combine proprietary hardware used for capturing an image and a personal computer to control the hardware and to run the software. The output of these systems is a color- coded map of the shape and curvature of the human cornea that vision care professionals can easily interpret and utilize for treatments such as vision correction and cataract surgery and corneal transplants, for diagnosis of astigmatisms and corneal diseases, and for contact lens fitting and custom lens manufacturing. OCULAR IMAGING BUSINESS OIS, which commenced business in 1986, is engaged in the business of designing, manufacturing, and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. OIS's current flagship products are its digital imaging systems, the WinStation 1024(TM) and WinStation 640(TM). These WinStation products are targeted primarily at retinal specialists and general ophthalmologists. OIS's WinStation systems are primarily used by ophthalmologists to perform a diagnostic test of the blood flow in the patient's retina. This procedure is used to diagnose and monitor diseases and provide important information in making treatment decisions. OIS also recently showed a digital fundus imager, which provides similar diagnostic capabilities, except that it provides a continuous image rather than a single frame image, and it will be sold at a lower price. In addition, OIS plans to market a Digital Slit Lamp which will be used to obtain live motion images of the surface of the eye. OIS has experienced operating losses for each fiscal year since its initial public offering in 1992. OIS expects to continue to incur operating losses for the foreseeable future and while a goal of the combined ophthalmic businesses is to achieve profitability through consolidation, we cannot assure you that OIS will be able to achieve or sustain significant revenues or profitability in the future. MARKET OVERVIEW DENTAL AND PERIODONTAL LASER MARKET The current market for laser equipment in dental procedures is comprised of hard and soft tissue procedures, composite curing and teeth whitening. HARD TISSUE PROCEDURES, INCLUDING CAVITY PREPARATION. Potential dental laser applications for procedures on teeth, also known as hard tissue procedures, include pit and fissure sealing, etching, caries removal and cavity preparation. Based on user feedback from our clinical sites, we believe that the use of a laser in dentistry reduces the pain associated with various traditional procedures performed with a dental drill. On May 7, 1997, our Er:YAG laser was cleared to market for tooth etching, caries removal and cavity preparation. This laser was the first to be cleared by the FDA for these procedures. We commenced 3 marketing of the Er:YAG laser for these procedures shortly after receipt of FDA clearance. SOFT TISSUE. The dental laser can be used for selected periodontal procedures and to treat early gum disease, postponing or in some cases eliminating the need for conventional periodontal surgery and providing the opportunity for overall cost savings. While we have clearance to market six lasers for soft tissue dental procedures, including the Aurora diode laser and Centauri Er:YAG laser, we focus our marketing efforts on our Aurora diode laser in this area. The Aurora also is the only diode laser with clearance for procedures involving removal of the pulp of the tooth. COMPOSITE CURING. Composites are rapidly replacing gold and silver fillings as the material of choice for restoration of cavities, because they more closely match the color of teeth and because gold and silver fillings have drawn increasing worldwide concern over safety due to the toxic gases which may be released when they are removed from teeth. Composite fillings are typically cured using a curing light which provides a broad spectrum of wavelengths. The use of the argon laser for this application has been shown to frequently result in a stronger restoration than composites cured by traditional curing lights. Our argon lasers can also be used to cure the resins used in placing veneers or bonding orthodontic brackets. Our Arago and MOD argon lasers have received FDA clearance for use in these applications. TEETH WHITENING. A large number of dentists use bleaching materials for teeth whitening. These materials are traditionally applied at night over a six to eight week period to whiten a patient's teeth while he or she sleeps. Lasers have been shown to facilitate the use of these light sensitive materials in the dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. Our MOD and Arago lasers have been cleared to market for this procedure. CAVITY PREVENTION. We are currently conducting research and initiating clinical trials to use our lasers for cavity prevention applications. Our clinical trials are at an early stage and we cannot assure you that FDA clearance will be obtained for these applications. OPHTHALMIC LASER AND DIAGNOSTIC MARKET Because of the importance of the cornea to visual performance, virtually all ophthalmologists and optometrists have historically used a measuring instrument known as a keratometer to quantify corneal curvature, in a procedure called keratometry. This instrument obtains only four measurement points, therefore it cannot accurately measure asymmetrical curvatures. A more precise instrument, called a corneal topographer, was developed to measure the curvature of the front of the eye. Applications of this device include: o important applications in selecting the appropriate procedure for each refractive patient, preoperative surgical planning, postoperative evaluation and patient follow-up o improved pre-surgical planning for removal of a cloudy lens in cataract surgery, assess and correct surgically induced astigmatism, which is the most frequent complication caused by intraocular lens surgery, potentially improve the calculation of the implanted intraocular lens power, and support combination cataract/refractive surgical procedures o improved surgical outcomes in corneal transplants allowing the practitioner to evaluate surgical technique and adjust postoperative treatment o analysis and diagnosis of astigmatism and various corneal diseases o several applications in contact lens fitting and manufacturing 4 The WinStation market consists of current owners of fundus cameras and anticipated purchasers of fundus cameras suitable for interfacing with the OIS's digital imaging system products. A fundus camera is a camera that produces photographs of the retina of the eye. Retinal specialists who number approximately 3,000 in the U.S., comprise the primary target market for digital angiography systems, which allow the visualization of the blood flow in the retina. For the past two years OIS digital imaging system sales have been driven in this segment to a large extent by a procedure known as indocyanine green angiography. This new diagnostic test procedure yields new clinically significant information that is helpful in the treatment of patients with macular degeneration, a leading cause of blindness which afflicts over 13 million people in the U.S. This procedure can only be performed using a digital imaging system. OIS introduced a digital fundus imager and Digital Slit Lamp which will allow full motion video of the eye at a relatively low cost. The total available market for diagnostic ophthalmic equipment consists of 16,000 ophthalmologists in the United States, 100,000 additional ophthalmologists in international markets and 36,000 optometrists in the United States. Following diagnostic procedures, laser systems have been used for the treatment of eye disorders for many years and are widely accepted in the ophthalmic community. Lasers have traditionally been sold for extra-ocular procedures and procedures in the back of the eye. We do not promote our lasers for these markets, which we believe are approaching saturation, but instead focus on intraocular, refractive vision correction and aesthetic procedures including anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting and cosmetic or aesthetic skin procedures. We have developed the Centauri Er:YAG laser which is capable of performing all of these procedures, which previously typically have been performed by several different types of medical lasers. To date, however, the Centauri laser has only been cleared for some of these procedures. A summary of the procedures for which the Centauri laser has been cleared appears under "Products-Laser Products." CATARACT REMOVAL PROCEDURES. We believe that no medical lasers have been approved to date for cataract extraction procedures, and that medical lasers may result in less trauma and inflammation than traditional surgical methods, providing more comfort to the patient. Our Centauri Er:YAG laser has been cleared to market for anterior capsulotomy, a procedure which opens the capsule of the eye prior to the removal of the cataract. We have also completed Phase II clinical trials on the Centauri laser for the breakup of the cataract itself, as an alternative to the emulsification of the cataract by ultrasonic energy. We believe that this patented technology for use in cataract removal may provide an easier and safer method. TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by increased pressure within the eyeball and progressive loss of vision, has traditionally been treated with drug therapy. When drug therapy is ineffective, periodic invasive surgery may be required. In these cases, lasers may be used to open a pathway into the eye in order to relieve pressure in the eye. This procedure, which may be repeated periodically, can be performed under local anesthesia with a self closing incision on an outpatient basis. We are currently conducting clinical trials prior to seeking clearance to market our Centauri Er:YAG laser for several alternative techniques for this procedure. We do not know whether the FDA will grant clearance for these techniques, however. CORNEAL SCULPTING. We believe that FDA approval of excimer lasers has resulted in greater acceptance and recognition of laser refractive surgery in the ophthalmic market. Medical lasers may be used for corneal sculpting, a procedure in which the laser is used to sculpt the cornea of the eye to a desired curvature to correct nearsightedness, farsightedness or astigmatism. We plan to seek approval to market the Centauri laser for corneal sculpting and have initiated studies in preparation for regulatory submittal for this application. We do not know whether the FDA will grant clearance for this procedure, however. AESTHETIC SURGICAL PROCEDURES. We have received clearance for the use of our lasers in selected aesthetic procedures such as skin resurfacing and eyelid surgery. We plan to begin marketing some of these products for aesthetic applications during the current year. 5 SURGICAL LASER MARKET Laser systems have been approved for and are currently being used in a variety of surgical applications including orthopedics, neurosurgery, urology, gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic surgery. Although our products are cleared to market in a number of specialty areas within the surgical market, we have specifically targeted tissue melding, also known as tissue fusion, and aesthetic applications within the surgical market. TISSUE MELDING. We believe a significant number of wound closure procedures may be addressed with surgical lasers in conjunction with or independent of traditional sutures or staples. The clinically demonstrated benefits of the use of surgical lasers for tissue melding, as compared to sutures and staples, include fluid-static seals, immediate strength of the closure and reduced surgical time. Along with our strategic partner, we have conducted animal tests to support regulatory submittals for the use of our Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are currently conducting clinical studies for skin and hypospadias. We have also completed clinical trials for vasovasotomy, which is the reversal of vasectomies. These trials demonstrated a success rate of approximately 89%. We are also beginning Phase I clinical trials for the treatment of hypospadias, the lengthening of the urethra to the end of the penis in infants, in which it is anticipated that the laser's fluid-static seal may minimize post-surgical complications such as the leakage of urine which results in secondary surgical procedures. We have clearance for Phase II clinical trials for skin closure following mastectomies and eyelid surgery at five clinical sites. Artery and vein melding has been tested in animals by our strategic partner in preparation for clinical studies. AESTHETIC SURGICAL PROCEDURES. The market for aesthetic surgery is growing rapidly worldwide. We have a number of approvals for lasers to be used in aesthetic applications and will devote further efforts in the future to entering into and capitalizing on this market. We have regulatory clearance to market our products for a variety of additional applications, including in urology, orthopedics, gynecology, gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In areas where our technology is not being fully utilized, we may seek agreements to supply our products under private label for other manufacturers or may enter into strategic alliances to develop and market our lasers for other applications. PRODUCTS LASER PRODUCTS The use of laser technology in dentistry, ophthalmology and surgery involves the controlled application of laser light to hard or soft tissue causing an optical, thermal, acoustic or plasma interaction with the tissue. When applied to tissue, the laser light is partially absorbed. This process of absorption converts the light to heat, which in turn alters the state of the tissue. The degree of tissue absorption varies with the choice of wavelength and is an important variable in the application of laser technology in treating various tissues. The laser energy can also form a gas bubble in a water medium which provides an acoustic cutting effect as it bursts. Our lasers often use proprietary delivery systems to control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting effects. These delivery systems include flexible fiberoptics, waveguides, articulated arms and micromanipulators or scanners which are used on a disposable or limited reuse basis, and which we expect will provide a recurring revenue stream. Our strategy is to target specific applications in the dental, ophthalmic and surgical markets, where we believe that our technology and products have competitive strengths. Our line of portable lasers is specifically designed for use in outpatient surgical centers and medical offices. We believe that our lasers are also well suited for the international market, particularly in facilities 6 with many surgical suites where easy transportation of equipment is necessary. By employing techniques developed in the computer industry, we have designed a laser system that: o is modularly designed and uses similar components for multiple laser systems thereby reducing their overall cost o allows for efficient and inexpensive repair by replacing a board or assembly in the field or through the mail, reducing the need for a field service force o can be easily moved from the office to surgical centers because of its compact size and limited voltage requirements Our Er:YAG lasers are currently priced from $37,000 to $126,000 and our Nd:YAG lasers are currently priced from $25,000 to $80,000. Our diode lasers are currently priced from $22,000 to $35,000 and our argon lasers are priced from $5,500 to $22,000. The prices of lasers within these ranges depend upon each model's power capability and the features offered. The following table presents, in summary form, our principal lasers and delivery systems, the principal applications for which we intend to use them, and the FDA status of these products.
Product Medical Application FDA Regulatory Status - --------------------- ------------------------------------------------------- ----------------------- Centauri (Er:YAG) Dental--Soft Tissue....................................... Cleared to market Dental--Hard Tissue....................................... Cleared to market Ophthalmology (e.g. Anterior Capsulotomy) ................ Cleared to market Ab-externo and Ab-interno Sclerostomy, Laser Lens Emulsification............................................ Clinical Trials Corneal Sculpting......................................... Clinical Trials General Surgery, Neurosurgery, Orthopedics, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery...................... Cleared to market Polaris (1.32u Tissue Melding............................................ Clinical trials Nd:YAG) General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery.......... Cleared to market Aurora (diode) Dental--Soft Tissue....................................... Cleared to market Dental-Hygiene............................................ Cleared to market Dental-Endodontics........................................ Cleared to market Dental and General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Dermatology, Plastic Surgery, Podiatry, Neurosurgery, Gynecology, Pulmonary Surgery and Oral Surgery............ Cleared to market MOD and Arago Dental--Composite Curing.................................. Cleared to market (argon) Dental--Teeth Whitening................................... Cleared to market
7 CENTAURI ER:YAG LASER. Our Centauri Er:YAG laser is a portable Er:YAG pulsed solid state laser which generates high frequencies (up to 30Hz) at relatively low peak power. These high frequencies allow faster cutting at lower energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water, producing a cut similar to the scalpel. The Er:YAG wavelength is delivered through a fiber optic delivery system which enables the beams to be focused and angled. These fiberoptic catheters are difficult to produce and we have invested heavily in the technology to develop fibers which can handle adequate power. We have experienced difficulties in securing a consistent and reliable source for these fibers in the past. We presently have two sources for these fibers. See "--Manufacturing and Materials" and "Legal Proceedings." POLARIS ND:YAG LASERS. The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result these systems are the preferred lasers to limit bleeding during surgery and for procedures requiring fiberoptic delivery, such as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through small incisions, providing minimally invasive surgery to patients and usually reducing treatment costs and the length of hospital stays. This laser also uses our disposable unique TouchTIPS, AngleTIPS and sculptured fibers. By using the Polaris laser with TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile feeling of the scalpel or other surgical instruments. We believe that the availability of these technologies permits the use of a lower power laser system. With the exception of Japan, China and Taiwan, we hold the proprietary rights, including several patents, to manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser, together with specialized software and delivery systems, for tissue melding. We are developing the Polaris laser for use in cosmetic skin closures, vascular surgeries and minimally invasive surgical procedures normally performed with sutures and staples. Although the use of the Polaris laser for tissue melding is still in the clinical trial stage, and no clearance for this application has been received, we believe that tissue melding offers clinical advantages over traditional sutures and staples including fluid-static seals, immediate strength of the closure and reduced surgical time. AURORA DIODE LASER. The Aurora diode laser is our first semiconductor laser and is the first truly portable diode laser designed for dentistry. The Aurora diode laser replaced the 20 watt Pegasus laser for periodontal procedures, and is approximately one-fourth the size and one-half of the cost of that system. The diode wavelength is absorbed by blood and pigmentation and has been cleared for use in multiple specialties such as general surgery, ophthalmology, urology and plastic surgery. The Aurora laser, which was introduced for soft tissue dental applications in February 1996, is designed to utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia. The dental laser can also be used to treat early stage gum disease, postponing or in some cases eliminating the need for periodontal surgery and providing the opportunity for overall cost savings. We believe the Aurora laser compares favorably with competitive products including pulsed Nd:YAG lasers, which cannot produce the required laser settings for use with TouchTIPs, or in the new technique for the treatment of periodontal disease, as well as with CO2 lasers, which cannot be delivered through a fiber, and argon lasers, which tend to be slower in cutting and may produce charring. ARAGO AND MOD ARGON LASERS. The Arago and the MOD are gas lasers which have been cleared to market in dentistry to accelerate the composite curing process. Composites are rapidly replacing gold and silver fillings as the material of choice for the restoration of cavities. The argon wavelength penetrates through the composite and has been shown to frequently result in a stronger restoration than composites cured by traditional curing lights. Our argon lasers can also be used to cure the resins used in placing veneers or bonding orthodontic brackets. The argon laser can also be used to enhance teeth whitening procedures using light activated bleaching materials which have traditionally been applied at night over a six to eight week period. Lasers have been shown to facilitate the use of these light activated products in a dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. The argon laser has been cleared to market for this procedure. We cannot assure you that the use of the argon laser for teeth whitening will 8 become a widely accepted practice in the dental industry. We plan to bundle our lasers with light activated whitening materials and co-market these products with the manufacturers of these materials. We are currently manufacturing the MOD lasers in-house. The Arago laser is currently being supplied by a third party manufacturer. OTHER LASERS. We have developed other solid state pulsed lasers including the Sirius .532 Nd:YAG laser, Pegasus Nd:YAG, Orion Ho:YAG laser and the Arcturus alexandrite:YAG laser, and other applications for our existing lasers, but are not actively marketing these lasers at the present time. The following table briefly describes additional lasers owned by us which we do not currently market, and the principal applications for which we have clearance to market these lasers.
Product Medical Application FDA Regulatory Status - -------------------------------- -------------------------------------------------- ------------------------ Altair (CO2) Orthopedics General and Plastic Surgery, Dermatology, Podiatry Ear, Nose and Throat, Gynecology Pulmonary Procedures; Neurosurgery and Ophthalmology....................... Cleared to market Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal 40W/60W Procedures, Pulmonary Procedures, Gastroenterology, Gynecology and Ophthalmology........................................ Cleared to market Pegasus (Nd:YAG 20W) Dental-Soft Tissue................................... Cleared to market Dental-Endodontics................................... Cleared to market Pegasus (Nd:YAG) Oral, Arthroscopic and General Surgery, 100W Gastroenterology, Gastrointestinal and Genitourinary Procedures, Pulmonary Procedures, Gynecology, Neurosurgery and Ophthalmology........................................ Cleared to market Sirius (.532u Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and Orthopedic Applications................. Cleared to market Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat, Ophthalmology, Gastroenterology, Pulmonary Procedures and Urology..................... Cleared to market Er:YAG/Nd:YAG Various specialties.................................. Cleared to market (Combination)
LASER DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS While each laser system we market consists of a laser and an integral fiber, the fibers and other products, such as tubing sets and tips, are used by surgeons on a disposable or limited reuse basis for each clinical procedure. We believe that expansion into this market could provide us with a recurring revenue stream. CORNEAL TOPOGRAPHY PRODUCTS EYESYS 2000 CORNEAL ANALYSIS SYSTEM. The EyeSys System 2000 corneal topography instrument and associated Microsoft Windows(C) based software is targeted at refractive surgeons, general ophthalmologists and optometrists for diagnostic, surgical and contact lens fitting applications. The primary function of the instrument is to position a patient for corneal image capture, acquire the image of reflected rings and send the image to a personal computer for 9 further processing. The System 2000 is modular and we market it as a proprietary computer peripheral and software. The System 2000 hardware interfaces to the computer via a parallel port connection, allowing EyeSys to unbundle the computer, monitor, printer, tables and other third party items. This can significantly lower the price to the customer by allowing physicians to utilize hardware they already own. Last year we introduced what we believe to be the smallest hand-held topography system currently available. The Vista(TM) incorporates much of the same reliable and accurate software as the System 2000, but its portability facilitates its use in the operating room or by the optometrist. OCULAR IMAGING PRODUCTS OIS currently offers two products to the ophthalmic market: the WinStation 640 and the WinStation 1024, and intends to commence sales of a digital fundus imager and a Digital Slit Lamp within the next couple of months. OIS's WinStation systems are used by ophthalmologists to produce images of blood vessels within the eye. Whereas the traditional methods of obtaining these images utilize photographic film which requires special processing and printing, the WinStation systems allow for immediate diagnosis and treatment of the patient. The WinStation products enable the ophthalmologist to perform indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test procedure which is yielding new clinically significant information that is helpful in the treatment of patients with macular degeneration, a leading cause of blindness afflicting over 13 million people in the U.S. ICG angiography, used for approximately 10-20% of patient angiography, is a dye procedure that can only be performed using a digital imaging system. OIS also recently showed a digital fundus imager, which provides similar diagnostic capabilities, except that it provides a continuous image rather than a single fram image, and it will be sold at a lower price. Another of OIS's imaging products, the Digital Slit Lamp, will allow the ophthalmologist to obtain full motion video images of the surface of the eye. MARKETING, SALES AND SERVICE We market our products to the dental market in the United States directly to dentists through our direct sales force consisting of two area sales managers, a manufacturer's representative network consisting of approximately 15 manufacturer's representatives or companies and our distributor network. The dental market includes approximately 129,000 practicing dentists in the United States. We believe that in order to reach this market we must expand our U.S. distribution capabilities. We market our products primarily through conventions, educational courses, direct mail, telemarketing and other dental training programs. Through an active program of educational courses and preceptorships, we have trained dentists in many countries during the past two years using industry recognized dentists and periodontists. We market our products in the ophthalmic market jointly with OIS through a sales manager and six territory managers who focus their efforts on key ophthalmologists worldwide. We plan to expand our ophthalmic sales force both by enlarging our domestic sales force, either internally or through acquisition or distribution, by acquiring or engaging additional international manufacturing representatives, and by having existing international distributors carry our full product line. In 1997, EyeSys entered into an agreement with Marco Ophthalmic Inc. under which that company was appointed as a nonexclusive distributor in the United States of the System 2000 and the exclusive distributor of the Vista portable corneal topography system for a three-year period following commercialization of that system. Sales and marketing efforts for ophthalmic products are managed out of Sacramento, California. In the surgical market, we intend to form strategic alliances in any specialty area where the partner has an established presence in the market selling to either the physician or the hospital. We have entered into such a strategic alliance with Azwell, Inc. which is one of the leading suppliers of sutures in the Pacific Rim. Under our Exclusive Marketing Agreement with Azwell, Proclosure granted to Azwell, in exchange for a license fee, the exclusive rights to market and distribute the Polaris Nd:YAG laser in Japan, China and Taiwan. In addition, under this agreement we granted to Azwell an option to manufacture the Polaris, which if exercised would require Azwell to pay us a $1.5 million fee and royalties. Azwell has not yet indicated whether it intends 10 to manufacture these products. We do not know if we will receive any payments under this agreement. We have entered into distribution agreements with distributors in many countries for sales of our dental and ophthalmic products. We typically grant exclusive distribution rights in select territories to our distributors who usually must maintain agreed upon distribution minimums in order to retain their exclusive rights. These agreements are managed by three directors of distribution marketing and sales for the Pacific Rim; Europe, the Middle East and Africa; and Canada and South America. No customer accounted for more than 10% of our net sales, on a consolidated basis, in fiscal 1999 or fiscal 1998. During fiscal 1997, three customers each accounted for more than 10% of the sales of EyeSys: Marco accounted for 13% of sales, Newtech accounted for 14% of sales and Vistatek accounted for 15% of sales. We seek to create a group of loyal customers by focusing on customer service, quality and reliability. In addition to our educational courses, we perform a complete installation of our products and train the customers' staff in its proper use. Educational videos and papers are available upon request. We conduct service training courses for the representatives of our distributors. Prior to shipping, every product is subjected to an extensive battery of quality control tests. We generally provide a one year warranty with all products and extended warranties are available at an additional cost. If service is required, a product owner is either sent a loaner product by overnight carrier, returns his product for service or a service representative visits the owner to repair the unit. International service is provided either by the foreign distributor or by return of the product to us. We have experienced and may continue to experience difficulties in providing prompt and cost-effective service for our products internationally. We are working to improve the service training of our international distributors. COMPETITION We are, and will continue to be, subject to competition in our targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies or therapies, some of which include medical lasers manufactured by competitors. In the dental market, we compete primarily with dental drills, traditional curing lights and other existing technologies, and to a lesser extent competitors' CO2, argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, we face competition principally from: o traditional surgical treatments using a tearing needle in anterior capsulotomy o phacoemulsification, an ultrasound device used to break up cataracts in cataract removal procedures; o corrective eyewear such as eyeglasses and contact lenses and surgical treatments for refractive disorders using either an excimer laser or a scalpel o drug therapy or surgical treatment of glaucoma In the surgical market, wound closure procedures are usually performed using sutures and staples, and traditional cosmetic surgical procedures may be performed with a scalpel or other lasers. The medical laser industry in particular is also subject to intense competition and rapid technological change. There are approximately 30 competitors in different sectors of the medical laser industry. We believe that the principal competitive factors for medical laser products are the products' technological capabilities, proven clinical ability, patent protection, price and scope of regulatory approval, as well as industry expert endorsements. We believe that for many applications, our patented or patent pending methods and fiberoptic delivery systems provide clinical benefits over other currently known technologies and our competitors' laser products. 11 EyeSys' primary competitors in the corneal topography market are Tomey Technology, Alcon Surgical, Inc., a subsidiary of Nestle, Humphrey Instruments, a subsidiary of Carl Zeiss, and Orbtek, a subsidiary of Bausch and Lomb. Competition for products that can diagnose and evaluate eye disease is intense and is expected to increase. We are aware of three primary OIS competitors in the U.S.: Topcon, Humphrey Instruments and Tomey Technology. Four other companies are known to have systems in the international market, each with lesser market penetration. We believe that our ability to compete successfully against traditional treatments, competitive laser systems and treatments that may be developed in the future will depend on our ability to create and maintain advanced technology, develop proprietary products, obtain required regulatory approvals and clearances for our products, attract and retain scientific personnel, obtain patent or other proprietary protection for our products and technologies, and manufacture and successfully market products either alone or through other parties. Some of our competitors have substantially greater financial, technical and marketing resources than us. We cannot assure you that this competition will not adversely affect our results of operations or our ability to maintain or increase market share. SEASONALITY To date, our revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. We expect that this seasonality will continue indefinitely. RESEARCH AND DEVELOPMENT LASER BUSINESS In the past three fiscal years (1997-1999), Premier has invested in excess of $8.8 million in research and development programs. This amount is net of approximately $450,000 received under a Small Business Innovative Research Grant in fiscal 1997 and excludes a $12.9 million noncash charge for in-process research and development related to acquisitions in fiscal 1997 and 1998. This investment in research and development has resulted in the development of 20 models of lasers, reusable accessories such as smoke evacuators and irrigation aspiration systems, more than 1,000 types of custom delivery systems and approximately 20 types of surgical tips and accessories. Our current research is focused on expanding the clinical applications of our existing products, reducing the size and cost of current laser systems, developing custom delivery systems and developing new, innovative products. For our laser products, our in-house research and development efforts have focused on the development of a systems approach with proprietary delivery systems designed to allow the laser to interact with tissue by a number of different mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue effects. These disposable fiberoptic delivery systems, developed specifically for niche surgical applications, demonstrate the principal focus of our research efforts. Examples of patented or patent pending products resulting from these research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO2 waveguides. Clinical research has also yielded several new surgical procedures. CORNEAL TOPOGRAPHY BUSINESS EyeSys' research and development efforts are focused on further development of corneal topography systems, advanced applications software development, internationalization of software, minimization, simplification and optimization of the instrument and development of the next generation ophthalmic instrumentation. 12 OCULAR IMAGING BUSINESS OIS intends to devote significant resources to the development of telemedicine/managed care applications, the improvement of optics, new fundus camera interfaces for a green dye, software development (including the continued enhancement of WinStation), hardware optimization, and the patient/doctor interface. OIS's research and development expenditures in the year ended August 31, 1998 were $866,745 and in the year ended August 31, 1997, were $1,070,192. PATENTS AND PATENT APPLICATIONS Patent protection is an important part of our business strategy, and our success depends, in part, on our ability to maintain patents and trade secret protection and on our ability to operate without infringing on the rights of third parties. We have sought to protect our unique technologies and clinical advances through the use of the patent process. Patent applications filed in the United States are frequently also filed in selected foreign countries. We focus our efforts on filing only for those patents which we believe will provide us with key defensible features instead of filing for all potential minor device features. In the United States, we hold 33 patents and have an additional 24 pending patent applications, including divisional applications. In addition, we hold 23 foreign patents and have at least 44 foreign patent applications. We also have a nonexclusive license to a number of basic laser technologies which are commonly licensed on such basis in the laser industry. OIS holds one patent covering one of its products. We cannot assure you that our patents or trademarks would be upheld if challenged, or that competitors might not develop similar or superior processes or products outside the protection of any patents issued to us. In addition, we cannot assure you that we will have the financial or other resources necessary to enforce or defend a patent or trademark infringement or proprietary rights violation action. Although we currently carry insurance that might cover some of the amounts we could be liable for in patent litigation, if our products infringe patents, trademarks or proprietary rights of others, we could become liable for damages, which also could have a material adverse effect on us. We are aware of various patents which, along with other patents that may exist or be granted in the future, could restrict our right to market some of our technologies without a license, including, without limitation, patents relating to our lens emulsification product and ophthalmic probes for our Er:YAG laser. In the past, we have received allegations that certain of our laser products infringe other patents. There has been significant patent litigation in the medical and medical device laser industry. Adverse determinations in litigation or other patent proceedings in which we may become a party could subject us to significant legal judgments or liabilities to third parties, and could require us to seek licenses from third parties. We cannot assure you that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to us, if at all. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around these patents, or we could find that the development, manufacture or sale of products requiring these licenses could be enjoined. We also rely on unpatented proprietary technology, trade secrets and know-how. Certain components of some of our products are proprietary and constitute trade secrets, but others are purchased from third parties. There is no assurance that other parties will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our trade secrets in other ways, or disclose this technology, or that we can meaningfully protect our rights to our unpatented trade secrets. We seek to protect our unpatented proprietary technology, in part, through proprietary confidentiality and nondisclosure agreements with employees, consultants and other parties. We cannot assure you that proprietary information agreements with employees, consultants and others will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known to or independently developed by competitors. 13 GOVERNMENT REGULATION FDA REGULATION The products that we manufacture are regulated as medical devices by the FDA under the Food, Drug and Cosmetics Act (the "FDC Act"). Satisfaction of applicable regulatory requirements may take several years and requirements vary substantially based upon the type, complexity and novelty of such devices as well as the clinical procedure. Under the FDC Act and the applicable regulations, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in a variety of serious penalties. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device which we manufacture or distribute. The FDA classifies medical devices in commercial distribution into one of three classes: Class I, II or III. This classification is based on the controls the FDA deems necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are subject to general control, such as labeling, premarket notification and adherence to applicable requirements for Good Manufacturing Practices, known as "GMP's." Class II devices are subject to general and special controls, such as performance standards, postmarket surveillance, patient registries, and FDA guidelines. Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness. Class III devices include, for example, life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices. Our laser and diagnostic products typically are classified as Class II devices, but the FDA may classify some indications or technologies into Class III and require a premarket approval application. OIS's products are classified as Class II devices which require, among other things, annual registration, listing of devices, good manufacturing practices and labeling, and prohibition against misbranding and adulteration. If a manufacturer or distributor of a medical device can establish that a proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a pre-1976 Class III medical device for which the FDA has not called for a premarket approval application, that manufacturer or distributor may seek FDA clearance for the device by filing a Section 510(k) premarket notification. If a manufacturer or distributor of a medical device cannot establish that a proposed device is substantially equivalent to another legally marketed device, the manufacturer or distributor will have to seek premarket approval for the proposed device. A 510(k) notification and the claim of substantial equivalence will likely have to be supported by various types of data and materials, possibly including test results or the results of clinical studies in humans. A premarket approval application would have to be submitted and be supported by extensive data, including preclinical and clinical study data, to prove the safety and effectiveness of the device. We cannot assure you that some of our products will not require the more rigorous and time consuming premarket approval application process, including laser uses for vasovasotomy or other tissue melding procedures, cavity prevention, cosmetic surgery, sclerostomy and lens emulsification, among others. If human clinical studies of a proposed device are required, whether for a 510(k) or a premarket approval application, and the device presents a "significant risk," the manufacturer or the distributor of the devices will have to file an application for an investigational device exemption ("IDE") with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and mechanical laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. The FDA does not approve all IDE's that are submitted. Even if an IDE is approved, the FDA may determine that the data derived from these studies do not support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical studies are permitted to charge for those devices distributed in the course of the study, provided that this compensation does not exceed recovery of the costs of manufacture, research, development and handling. Clinical studies of nonsignificant risk devices may be performed without prior FDA approval, but various regulatory 14 requirements still apply, including the requirement for approval by an Institutional Review Board, conduct of the study according to applicable portions of the IDE regulations, and prohibitions against commercialization of an investigational device. The manufacturer or distributor may not place the device into interstate commerce until an order is issued by the FDA granting premarket clearance for the device. The FDA has no specific time limit by which it must respond to a 510(k) premarket notification. The FDA has recently been requiring more rigorous demonstration of substantial equivalence in connection with 510(k) notifications and the review time can take three to 12 months or longer for a 510(k). If a premarket approval application submission is filed, the FDA has by statute 180 days to review it; however, the review time is often extended significantly by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee may also evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's good manufacturing practice requirements prior to approval of a premarket approval application. Devices are cleared by 510(k) or approved by premarket approval application only for the specific intended uses claimed in the submission and agreed to by the FDA. Labeling and promotional activities are also subject to scrutiny by the FDA and, in some cases, by the Federal Trade Commission. Marketing or promotion of products for medical applications other than those that are cleared or approved could lead to enforcement action by the FDA. We cannot assure you that we will be able to obtain necessary regulatory approvals or clearances for our products on a timely basis or at all, and delays in receipt of or failure to receive these approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future requirements would have a material adverse effect on our business, financial condition and results of operations. FDA or other governmental approvals of products we develop in the future may require substantial filing fees which could limit the number of applications we seek and may entail limitations on the indicated uses for which such products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. REGULATORY STATUS OF PRODUCTS We have received 510(k) clearance to market the following lasers in an aggregate of more than 100 specialty areas: CO2 (four models: 10W, 20W, 35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two models); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron Nd:YAG (one model); Argon (three models); diode (four models); Nd:YAG/Er:YAG combination laser (one model). Each of these lasers has clearances in multiple specialty areas. We have also received 510(k) clearance to market a scanner, sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared wavelengths of our lasers. If a device for which we have already received 510(k) premarket clearance is changed or modified in design, components, method of manufacture or intended use, such that the safety or effectiveness of the device could be significantly affected, a new 510(k) premarket notification is required before the modified device can be marketed in the United States. We have made modifications to certain of our products which we believe do not require the submission of new 510(k) notifications. However, we cannot assure you that the FDA will agree with our determinations. If they did not, they could require us to discontinue marketing one or more of the modified devices until they have been cleared. There also can be no assurance that any FDA clearance of modifications would be granted should clearance be necessary. OIS has received 510(k) clearance for its digital angiography products and Digital Slit Lamp, and EyeSys has received 510(k) clearance for its System 2000 and Vista corneal topography systems. 15 We are currently conducting preclinical animal studies and clinical trials, both under approved IDEs and as nonsignificant risk studies. We do not know if the results of any of these clinical studies will be successful or if the FDA will require us to discontinue any of these studies in the interest of the public health or due to any violations of the FDA's IDE regulations. We cannot assure you that we will receive approval from the FDA to conduct any of the significant risk studies for which we seek IDE approval, or that the FDA will not disagree with our determination that any of its studies are "nonsignificant risk" studies and require us to obtain approval of an IDE before the study can continue. ADDITIONAL REGULATORY REQUIREMENTS Any products manufactured or distributed by us under a 510(k) premarket clearance notification or premarket approval application are or will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires us to manufacture our products in registered establishments and in accordance with current GMP regulations, which include testing, control and documentation requirements. We must also comply with Medical Device Reporting requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. Our facilities in the United States are periodically inspected by the FDA. The FDA may require postmarketing surveillance with respect to our products. The export of medical devices is also regulated in some instances. All lasers that we manufacture are required under the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the FDA. The law requires laser manufacturers to file new product and annual reports and to maintain quality control, product testing and sales records, to incorporate certain design and operating features in lasers sold to end users under a performance standard, and to comply with labeling and certification requirements. Various warning labels must be affixed to the laser, depending on the class of the product under the performance standard. In addition, the use of our products may be regulated by various state agencies. For instance, we are required to register as a medical device manufacturer with various state agencies. In addition to being subject to inspection by the FDA, we also will be routinely inspected by the State of California for compliance with GMP regulations and other requirements. Although we believe that we currently comply in all material respects and will continue to comply with the applicable regulations regarding the manufacture and sale of medical devices, these regulations may change periodically and depend heavily on administrative interpretations. OIS has recently outsourced its manufacturing operations to Premier, and therefore OIS also depends on Premier's continuing compliance with these regulations. It is possible that future changes in law, regulations, review guidelines or administrative interpretations by the FDA or other regulatory bodies, with possible retroactive effect, could adversely affect our business, financial condition and results of operations. In addition to the foregoing, we are governed by numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that we will not be required to incur significant costs to comply with these laws and regulations in the future, or that these laws or regulations will not have a material adverse effect upon our ability to conduct business. Furthermore, the introduction of our products in foreign countries often requires obtaining foreign regulatory clearances, and additional safety and effectiveness standards are required in various other countries. We believe that only a limited number of foreign countries currently have extensive regulatory requirements. These countries include the European Union countries, Canada, Mexico and Japan. Domestic manufacturing locations of American companies doing business in some foreign countries, including European Union countries, may be subject to inspection. The time required for regulatory approval in foreign countries varies and can take a number of years. During the period in which we will be attempting to obtain the necessary regulatory approvals, we 16 expect to market our products on a limited basis in other countries that do not require regulatory approval. We cannot assure you that our products will be cleared or approved by the FDA or other governmental agencies for additional applications in the United States or in other countries or that countries that do not now require regulatory approval will not require this approval in the future. MANUFACTURING AND MATERIALS Manufacturing of our products consists of component assembly and systems integration of electronic, mechanical and optical components and modules. Our product costs are principally related to the purchase of raw materials while labor and overhead have been reduced due to the use of customized tooling and automated test systems. We believe that our customized tooling and automated systems improve quality and manufacturing reliability resulting in lower overall manufacturing costs. We believe that these systems will allow us to expand production rapidly. Recently, OIS has outsourced the assembly of its products to Premier. We purchase some of the raw materials, components and subassemblies included in our products and OIS's products from a limited group of qualified suppliers and do not maintain long-term supply contracts with any of our key suppliers. While multiple sources of supply exist for most critical components used in our laser, corneal topography and fiberoptic delivery systems, the disruption or termination of these sources could prevent us from being able to ship products, which would materially harm our business. Vendor delays or quality problems could also result in production delays of up to six months as several components have long production lead times. These long lead times, as well as the need for demonstration units, require a significant portion of working capital to fund inventory growth. We have in the past experienced, and may continue to experience, shortages in raw materials and supplies. We own the molds used to produce some of the proprietary parts of the devices. We also design and develop the software necessary for the operation of our laser systems. We design and assemble our own fiberoptic delivery systems and laser accessory equipment such as laser carts and associated disposable supplies. We believe that our manufacturing practices comply with GMP regulations. BACKLOG OF ORDERS We typically ship to order and therefore have no material backlog. PRODUCT LIABILITY AND INSURANCE Since our products are intended for use in the treatment of human medical conditions, we are subject to an inherent risk of product liability and other liability claims which may involve significant claims and defense costs. We currently have product liability insurance with coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate per year. Product liability insurance is expensive and includes various coverage exclusions, and in the future may not be available in acceptable amounts, on acceptable terms, or at all. Although we do not have any outstanding product liability claims, in the event we were to be held liable for damages exceeding the limits of our insurance coverage or outside of the scope of our coverage, our business and results of operations could be materially adversely affected. Our reputation and business could also be adversely affected by product liability claims, regardless of their merit or eventual outcome. EMPLOYEES As of June 25, 1999, Premier (including EyeSys, but excluding OIS) employed 75 people, 2 of whom are employed on a part-time basis. None of these employees are represented by a union. Twenty employees perform sales, marketing and customer support activities. The remaining employees perform manufacturing, financial, administration, regulatory, research and development and quality 17 control activities. We also engage the services of many independent contractors and temporary personnel. We have no collective bargaining agreements covering any of our employees, have never experienced any material labor disruption, and are unaware of any current efforts or plans to organize our employees. We consider our relationship with our employees to be good. OIS EMPLOYEES As of June 25, 1999, OIS had 26 employees, 24 of which were full time employees. These include 12 persons engaged in sales, marketing and customer support activities. OIS also engages the services of consultants from time to time to assist it on specific projects in the area of research and development, software development, regulatory affairs, and product services. These consultants periodically engage contract engineers as independent consultants for specific projects. RISK FACTORS Before you invest in our common stock, you should be aware that there are various risks, including those described below. You should carefully consider these risk factors, together with all the other information included or incorporated by reference in this report, before you decide whether to purchase shares of our common stock. Some of the information in this report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," and "continue" or similar words. You should read statements that contain these words carefully because they (1) discuss our future expectations; (2) contain projections of our future results of operations or of our financial condition; or (3) state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operations and financial condition. WE HAVE INCURRED NET LOSSES SINCE INCEPTION AND EXPECT FUTURE LOSSES We incurred net losses of approximately $79,451,000 from April 1, 1995 through March 31, 1999, and approximately $28,961,000 for the fiscal year ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately $92,315,000. We expect to continue to incur net losses until product sales generate sufficient revenues to fund our continuing operations. WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY Our ability to achieve profitability in the future will depend in part on our ability to continue to successfully develop clinical applications, obtain regulatory approvals for our products and sell these products on a wide scale. These risks apply to both our laser products and our ophthalmic diagnostic products. In turn, our future sales and profitability depend in part on our ability to demonstrate to dentists, ophthalmologists, optometrists and other physicians the potential cost and performance advantages of our laser systems, diagnostic products and other products over traditional methods of treatment and over competitive products. To date, commercial sales of our lasers and diagnostic products have been limited, and we do not know if these products can be successfully commercialized on a broad basis. Our products may not be accepted by the medical or dental community or by patients. The acceptance of dental lasers may be adversely affected by their high cost, concerns by patients and dentists relating to their safety and efficacy, and the substantial market acceptance and penetration of alternative dental tools such as the dental drill. Current economic pressure may make 18 doctors and dentists reluctant to purchase substantial capital equipment or invest in new technology. We currently have a limited sales force and will need to hire additional sales and marketing personnel to increase the general acceptance of our products. The failure of our products to achieve broad market acceptance would injure our business, financial condition and results of operations. WE ARE INVOLVED IN PENDING LITIGATION AND A REGULATORY INVESTIGATION We have been sued in a number of related securities class action matters, generally relating to allegations of misrepresentations during the period May 7, 1997 to April 15, 1998. In addition, the Securities and Exchange Commission has commenced an investigation of our practices and procedures relating to revenue recognition issues and related matters. The costs of our continuing defense of the litigation matters and responses to the regulatory investigations, including accounting and legal fees as well as management time and effort, will be substantial, and we expect these costs to materially and adversely affect our results of operations for the foreseeable future. We have reached an agreement in principle to settle this litigation and recorded an expense in the quarter ended December 31, 1998, relating to this settlement. However, this settlement is subject to several conditions, and it is possible that it may not be completed, in which case the litigation would continue. An adverse judgment entered in this litigation could materially and adversely affect our business and results of operations. In addition, the Securities and Exchange Commission is empowered to assess substantial penalties against us in connection with its findings in the pending investigation. The imposition of any of these penalties could materially and adversely affect our business, financial condition and results of operations. WE MAY HAVE DIFFICULTY INTEGRATING THE OIS BUSINESS We acquired a majority of the outstanding common stock of OIS in 1998, and in March 1999 we agreed to manufacture OIS's products on an outsourcing basis. In addition, Premier has offered to acquire the remaining outstanding stock of OIS, however, no agreement has been reached regarding such acquisition. We are not sure if the synergies of the two entities will allow us to reduce expenses in such a way as to make OIS profitable. In addition, members of our management will have to continue to expend time and effort on new activities relating to the OIS operations, which will detract from their time available to attend to our other activities. We cannot assure you that the expenses or dislocations that we may suffer as a result of the coordination of these businesses will not be material. WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS We purchase some of the raw materials, components and subassemblies included in our products from a limited group of qualified suppliers and do not maintain long-term supply contracts with any of our key suppliers. While we believe that alternative suppliers could be found for all of our components, we cannot assure you that any supplier could be replaced in a timely manner. Any interruption in the supply of key components could materially harm our ability to manufacture our products and our business, financial condition and results of operations. Some of the components used by EyeSys and OIS are manufactured by a sole vendor. These components are subject to rapid innovation and obsolescence. The discontinuance of the manufacturing of these components may require us to redesign some of the hardware and software used in our products to accommodate a replacement component. We cannot assure your that such an event would not prove costly or cause a disruption in sales of corneal topography and digital imaging systems. OUR FOREIGN SALES ARE SUBJECT TO RISKS A substantial portion of our sales are made in foreign markets. Foreign sales expose us to risks, including: 19 o the difficulty and expense of maintaining foreign sales distribution channels o barriers to trade o potential fluctuations in foreign currency exchange rates o political and economic instability in the foreign market o availability of suitable export financing o difficulty in collecting accounts receivable o tariff regulations o governmental quotas and other regulations o shipping delays o foreign taxes o export licensing requirements The regulation of medical devices worldwide also continues to develop, and it is possible that new laws or regulations could be enacted which would have an adverse effect on our business. In addition, we may experience additional difficulties in providing prompt and cost effective service of our medical lasers in foreign countries. We do not carry insurance against these risks. The occurrence of any one or more of these events may individually or in the aggregate have a material adverse effect upon our business, financial condition and results of operations. OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE The markets in which our medical products compete are subject to rapid technological change as well as the potential development of alternative surgical techniques or new pharmaceutical products. These changes could render our products uncompetitive or obsolete. We will be required to invest in research and development to attempt to maintain and enhance our existing products and develop new products. We do not know if our research and development efforts will result in the introduction of new products or product improvements. WE ARE DEPENDENT ON PATENTS AND PROPRIETARY TECHNOLOGY Our success will depend in part on our ability to obtain patent protection for products and processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. While we hold a number of U.S. and foreign patents and have other patent applications pending in the United States and foreign countries, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will exclude competitors or that any of our patents will be held valid if subsequently challenged. Further, other companies may independently develop similar products, duplicate our products or design products that circumvent our patents. We are aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict our right to market some of our technologies without a license, including, among others, patents relating to our lens emulsification product and ophthalmic probes for the Er:YAG laser. In the past, we have received allegations that some of our laser products infringe on other patents. There has been significant patent litigation in the medical laser industry. Adverse determinations in litigation or other patent proceedings to which we may become a party could subject us to significant legal judgments or other liabilities to third parties and could require us to seek licenses from third parties that may or may not be economically viable. We cannot assure you that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to us. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around these patents, or we could find that the development, manufacture or sale of products requiring these licenses could be enjoined. We also rely upon unpatented trade secrets, and we cannot assure you that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, at each balance sheet date, we are required to review the value of our intangible assets based on various factors, such as changes in technology. Any adjustment downward in the value of our intangible assets may result in a write-off of the intangible asset and a 20 substantial charge to earnings, which would adversely affect our operating results in the future. OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION Our products are regulated as medical devices by the Federal Drug Administration. As such, these devices require either Section 510(k) premarket clearance or approval of a premarket approval application by the FDA prior to commercialization. Satisfaction of regulatory requirements is expensive and may take several years to complete. We cannot assure you that further clinical trials of our medical products or of any future products will be successfully completed or, if they are completed, that any requisite FDA or foreign governmental approvals will be obtained. FDA or other governmental approvals of products we may develop in the future may require substantial filing fees which could limit the number of applications we seek and may entail limitations on the indicated uses for which our products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Also, we have made modifications to some of our existing products which we do not believe require the submission of a new 510(k) notification to the FDA. However, we cannot assure you that the FDA would agree with our determination. If the FDA did not agree with our determination, they could require us to cease marketing one or more of the modified devices until the devices have been cleared. We are also required to adhere to a wide variety of other regulations governing the operation of our business. Noncompliance with state, local, federal or foreign requirements can result in serious penalties that could harm our business. WE ARE DEPENDENT ON KEY PERSONNEL We depend to a considerable degree on a limited number of key personnel, including Colette Cozean, Ph.D., our Chairman of the Board, President, Chief Executive Officer and Director of Research. Dr. Cozean is also an inventor of a number of our patented technologies. During our limited operating history, many key responsibilities have been assigned to a relatively small number of individuals. The loss of Dr. Cozean's services or those of other key members of management could harm our business. We carry key person life insurance in excess of $3 million on Dr. Cozean. Our success will also depend, among other factors, on the successful recruitment and retention of qualified technical and other personnel. OUR BUSINESS IS HIGHLY COMPETITIVE We are, and will continue to be, subject to intense competition in our targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies, and competitive products. Many of our competitors have substantially greater financial, marketing and manufacturing resources and experience than us. Furthermore, we expect that other companies will enter the laser market, particularly as medical lasers gain increasing market acceptance. Significant competitive factors which will affect future sales in the marketplace include regulatory approvals, performance, pricing and general market acceptance. The ophthalmic diagnostic market is also highly competitive. There are many companies engaged in this market, some with significantly greater resources than us. Our competitors may be able to develop technologies, procedures or products that are more effective or economical than ours, or that would render our products obsolete or noncompetitive. To continue to remain competitive, we must develop new software and hardware meeting the needs of ophthalmologists and optometrists. Our future revenues will depend, in part, on our ability to develop and commercialize these 21 new products as well as on the success of development and commercialization efforts of our competitors. OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE Due to the relatively high sales price of our products and low sales unit volume, minor timing differences in receipt of customer orders have produced and could continue to produce significant fluctuations in quarterly results. In addition, if anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high, and our operating results for that quarter, and potentially for future quarters, would be adversely affected. Quarterly results may also fluctuate based on a variety of other factors, such as: o seasonality o production delays o product mix o cancellation or rescheduling of orders o new product announcements by competitors o receipt of FDA clearances or approvals by us or our competitors o notices of product suspension or recall o our ability to manage product transitions o sales prices o market conditions WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE In the future, we will require substantial additional funds for research and development programs, preclinical and clinical testing, development of our sales and distribution force, operating expenses, regulatory processes and manufacturing and marketing programs. Our capital requirements may vary, and will depend on numerous factors, including: o the progress of research and development programs o results of preclinical and clinical testing o the time and cost involved in obtaining regulatory approvals o the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights o competing technological and market developments o developments and changes in our existing research o licensing and other relationships o the terms of any new collaborative, licensing and other arrangements that we may establish o the amount of legal, accounting and administrative costs incurred in connection with pending litigation We believe that our available short-term assets and investment income will be sufficient to meet our operating expenses and capital expenditures through the next 12 months. We do not know if additional financing will be available when needed, or if it is available, if it will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate research and product development programs or to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop our self. OUR STOCK PRICE IS VOLATILE Our common stock was first publicly traded in December 1994 and has had last reported closing sale prices ranging from a low of $1.875 per share to a high of $14.00 per share. The market price of our common stock could continue to fluctuate substantially due to a variety of factors, including: 22 o quarterly fluctuations in results of operations o the commencement of or major developments in litigation o announcement of key developments or new products by competitors o changes in regulatory environment or market conditions affecting the medical laser industry o developments with respect to patents or proprietary rights o announcement and market acceptance of acquisitions o changes in earnings estimates by analysts o press coverage of favorable or unfavorable developments in our business o loss of key personnel o changes in accounting principles or policies o sales of common stock by existing stockholders o economic and political conditions The market price for our common stock may also be affected by our ability to meet analysts' expectations. Any failure to meet these expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the market prices of securities issued by many companies may change for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against the company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business, results of operations and financial condition. DEFECTS IN OUR PRODUCTS WOULD HARM OUR BUSINESS The sale of our medical products involves the inherent risk of product liability claims against us. We currently maintain product liability insurance coverage in the amount of $5 million per occurrence and $5 million in the aggregate, but this insurance is expensive, subject to various coverage exclusions and may not be obtainable in the future on terms acceptable to us. We do not know whether claims against us arising with respect to our products will be successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful claim against us in excess of our insurance coverage could materially harm our business. THERE ARE LIMITATIONS ON THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS Our laser systems and other products are generally purchased by physicians, dentists and surgical centers which then bill various third party payors, such as government programs and private insurance plans, for the procedures conducted using these products. Third-party payors carefully review and are increasingly challenging the prices charged for medical products and services, and scrutinizing whether to cover new products and evaluating the level of reimbursement for covered products. While we believe that the laser procedures using our products have generally been reimbursed, payors may deny coverage and reimbursement for our products if they determine that the device was not reasonable and necessary for the purpose for which it was used, was investigational or not cost-effective. As a result, we cannot assure you that reimbursement from third party payors for these procedures will be available or if available, that reimbursement will not be limited. If third party reimbursement of these procedures is not available, it will be more difficult for us to sell our products on a profitable basis. Moreover, we are unable to predict what legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation may have on us. UNCERTAINTIES REGARDING HEALTH CARE REFORM Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system and further reduce and control health care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products. If adopted and 23 implemented, such reforms could have a material adverse effect on our business, financial condition and results of operations. A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE, AND THEIR SALE COULD DEPRESS OUR STOCK PRICE Sales of a substantial number of our shares of common stock in the public market could adversely affect the market price for our common stock. At this time, approximately 7.6 million shares of our common stock are issuable upon the full exercise of our outstanding Class B Warrants, and over 6.4 million shares of our common stock are issuable upon exercise of other outstanding warrants and options and conversion of outstanding debentures. The existence of these outstanding warrants and options could adversely affect our ability to obtain future financing. We have also reserved 2,250,000 shares of our common stock for issuance in connection with the proposed settlement of outstanding litigation. The consummation of this settlement will require satisfaction of a number of conditions, and we cannot assure you that the settlement will be completed. The price which we may receive for our common stock issued upon exercise of outstanding options and warrants will likely be less than the market price of our common stock at the time these options and warrants are exercised. Moreover, the holders of the options and warrants might be expected to exercise them at a time when we would, in all likelihood, be able to obtain needed capital by a new offering of our securities on terms more favorable than those provided for by the options and warrants. OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY Our articles of incorporation authorize the issuance of 8,850,000 shares of "blank check" preferred stock, which will have terms as may be determined from time to time by the board of directors. Accordingly, the board of directors is empowered, without stockholder approval, to issue preferred stock with terms which could adversely affect the rights of the holders of the common stock. The preferred stock could also be utilized as a method of discouraging, delaying or preventing a change in control of Premier. In March 1998, we adopted a Shareholder Rights Plan, which entitles certain of our shareholders to purchase our Series A Junior Participating Preferred Stock. These rights are not exercisable until the acquisition by a person or affiliated group of 15% or more of the outstanding shares of our common stock, or the commencement or announcement of a tender offer or exchange offer which would result in the acquisition of 15% or more of our outstanding shares. Upon request, we will provide you with a copy of the Shareholder Rights Plan. The Shareholder Rights Plan may have the effect of discouraging, delaying or preventing a change of control of Premier. SHORT SELLING OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE Downward pressure on the market price of the common stock may result from sales of common stock issued upon conversion of the debentures and payment of interest thereon. This downward pressure could encourage short sales of common stock by the selling shareholders or others. Material amounts of short selling could place further downward pressure on the market price of the common stock. UNCERTAINTIES REGARDING THE YEAR 2000 ISSUE We have not developed a formal assessment of all potential impacts of the year 2000. We design, manufacture and sell medical products which contain computer chips and we utilize software developed by other companies. While our engineers are developing new software which they expect to complete by mid- 1999, there can be no assurance that their efforts will be successful. We rely on external business partners. As such, there can be no assurance that our business will not be negatively affected by year 2000 problems experienced by these business partners. 24 ITEM 2. PROPERTIES. EXECUTIVE OFFICES AND MANUFACTURING FACILITIES We lease approximately 41,000 square feet in one facility in Irvine, California pursuant to a lease which expires in December 2000. This facility contains our executive offices, service center and manufacturing space. While we believe that our manufacturing and administrative facilities are adequate to satisfy our needs through at least 2000, we may need to lease additional clean room facilities in the future. OIS FACILITIES OIS leases, under a triple net lease, approximately 9,675 square feet of office, manufacturing, and warehouse space in Sacramento, California under a month-to-month arrangement, and leases approximately 200 square feet of space for a sales office in Simsbury, Connecticut. ITEM 3. LEGAL PROCEEDINGS. LEASE LITIGATION In February 1999, we were sued by Telephone Real Estate Equity Trust, Inc., a company that had leased office space to EyeSys, under a lease that has now terminated. The case is pending in the District Court of Harris County, Texas. The former lessor contends that EyeSys did not validly exercise its rights to terminate the lease, and that it is therefore liable for amounts specified in the lease. This case is presently in the discovery stage. We intend to vigorously defend this case. OPTICAL FIBER LITIGATION In March 1994, we instituted litigation (the "Fiber Litigation") in the U.S. District Court, Central District of California, against Infrared Fiber Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical fiber to us for our ER:YAG laser. Two of IFS's senior officers are also named as defendants. Our complaint in this matter alleges that IFS and two of its officers made misrepresentations to us and that IFS breached its agreement to supply fibers and warranties concerning the quality of the fiber to be provided. We are seeking damages and an injunction requiring IFS to subcontract the production of optical fiber to a third party, as provided in the supply agreement. In April 1994, IFS filed a general denial and a cross-complaint against us alleging breach of contract and intentional interference with prospective economic advantage, seeking compensatory damages "in excess of $500,000," punitive damages and a judicial declaration that the contract has been terminated and that IFS is free to market its fibers to others. In September 1996, IFS filed a new cross-complaint alleging the same causes of action and seeking substantially the same relief in the Orange County California Superior Court. We have filed an answer to the complaint, denying the allegations and asserting several affirmative defenses. IFS has agreed to license certain fiber technologies, to which we claim exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of ours. Coherent joined the above federal litigation on behalf of IFS, seeking a declaration that IFS had the legal right to enter into this license and supply the fiber covered by that agreement, and then subsequently filed a new complaint in the Orange County California Superior Court for declaratory relief, seeking an order that our original agreement with IFS applies only to a specific type of optical fiber. We have answered this complaint. We have reached an agreement in principle with IFS to settle the litigation between us and are in the process of preparing a written settlement agreement. Although we are hopeful that the formal settlement agreement will be successfully negotiated, we cannot assure you that the agreement will actually be completed. The settlement agreement under discussion does not terminate the litigation as between Premier and Coherent. In May 1995, we instituted litigation concerning this dispute in the Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ('Westinghouse") and an individual employee of Westinghouse who was 25 an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit described above and interfered with our contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995, the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by us in the federal action. In July 1996, the court in the California state court action granted demurrers by Westinghouse and the employee of Westinghouse to all causes of action against them, as well as all but one of our claims against Coherent. As a result, the claims that were the subject of the granted demurrer have been dismissed, subject to our right to appeal. We appealed these decisions as they related to Westinghouse and the Westinghouse employee, however, the Court of Appeals affirmed the state court's decision. No trial date has been set as to the remaining outstanding causes of action. SECURITIES CLASS ACTION On May 1, 1998, a class action suit (the "Valenti Litigation") was commenced in the United States District of Court for the Central District of California under the federal securities laws on behalf of purchasers of our securities during the period from February 12, 1998 through April 15, 1998. The complaint alleges that Premier and certain of our officers and directors violated the federal securities laws by issuing false and misleading statements and omitting material facts regarding our financial results and operations during such period. Among other things, the complaint alleges that the defendants materially misstated our financial results for the fiscal quarter ended December 31, 1997 and that as a result of such misstatements, the plaintiff suffered damages as a result of a decrease in the market price of our publicly traded securities. After the filing of this complaint, a number of similar complaints were also filed in the United States District Court for the Central District of California, seeking certification as class actions, and covering class periods commencing as early as May 7, 1997. These complaints alleged facts similar to those described above with respect to the Valenti Litigation, as well as allegations that we artificially inflated the price of our outstanding publicly traded securities as a result of misrepresentations relating to the market and prospects for sale of our Centauri ER:YAG laser. All of the above described complaints seek monetary damages in unspecified amounts, together with attorneys fees, interest, costs and related remedies. All of these class action lawsuits have now been consolidated into a single action. We have also been named as a nominal defendant in a shareholder derivative lawsuit filed in the Orange County, California Superior Court, in a case captioned Eskeland vs. Cozean, et al. The complaint was filed by a shareholder of ours, on behalf of Premier, against some of our current and former officers and directors, including Colette Cozean, Michael Hiebert, Richard Roemer, Ronald Higgins, Patrick Day, Grace Ching-Hsin Lin, G. Lynn Powell, and E. Donald Shapiro. The complaint alleges, among other things, that these persons violated their fiduciary duty to Premier by exposing Premier to liability under the securities laws, failing to ensure that Premier maintained adequate accounting controls, and related alleged actions and omissions. Although Premier is a named defendant, the lawsuit seeks to recover damages from the individual defendants on behalf of Premier. Accordingly, it is not clear whether Premier will have any liability or incur any material loss as a result of being named as a defendant in this matter. Premier has reached a agreement in principle with lead plaintiffs and their counsel to settle these lawsuits. In exchange for the release of all claims against Premier and its officers and directors, this agreement requires Premier to issue to the defendants an aggregate of 2,250,000 shares of its common stock and requires Premier's insurance carrier would pay $4.6 million in cash. This agreement is not final, however, and is subject to several conditions, including the approval by the court and execution of a final settlement agreement. INVESTIGATIONS AND OTHER MATTERS We have been notified that the Securities and Exchange Commission has instituted an investigation concerning matters pertaining to our revenue reporting practices, and related management issues. We are cooperating with the Securities and Exchange Commission in connection with this investigation. This investigation, we believe, generally relates to whether Premier, in Securities and Exchange Commission filings and press releases issued prior to the end of the 1998 fiscal year, properly recognized revenues for transactions occurring 26 during fiscal 1997, and at interim periods in fiscal 1998. To date, the Securities and Exchange Commission has not indicated that it is seeking to impose any penalties on Premier or that it is made any specific findings with respect to our accounting practices. In May 1998, the Nasdaq Stock Market suspended the trading of our securities and notified us that they intended to delist these securities. We appealed this proposed action, and in October 1998 our appeal was granted. Trading of our securities on the Nasdaq Stock Market National Market recommenced on October 22, 1998. We are also involved in various disputes and other lawsuits from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the IFS litigation, securities class actions, disputes and other lawsuits may adversely affect us. OIS LITIGATION On September 6, 1996, a former employee of OIS filed an action in Superior Court in the County of Sacramento, California against OIS by alleging that he was wrongfully terminated by OIS in retaliation for filing a grievance against a co-employee for harassment and creation of a hostile work environment. The suit seeks, among other things, lost wages, $150,000 in compensatory damages, and punitive damages. OIS believes that this action is without merit and intends to defend this action vigorously. On or about August 17, 1997, OIS was advised that J.B. Oxford & Company, one of several market makers in OIS's common shares which trade over the counter on the Nasdaq Stock Market Small-Cap Market, was being investigated by the SEC. OIS is cooperating with the Securities and Exchange Commission investigation of J.B. Oxford & Company. OIS does not believe that it is a subject of these Securities and Exchange Commission inquiries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We held our annual meeting of shareholders on February 26, 1999, at which meeting our shareholders were asked to consider and vote upon (1) the election of directors and (2) the 1998 Stock Option Plan. At such meeting the shareholders elected the following individuals as directors: Shares Voting ---------------------------- Director For Against -------- --- ------- Colette Cozean, Ph.D. 13,618,155 310,472 Patrick J. Day 13,617,505 311,122 G. Lynn Powell, D.D.S. 13,624,584 304,043 Lawrence D. Ashcroft 13,624,151 304,476 Fredric J. Feldman, Ph.D. 13,623,584 305,043 John D. Hunkeler, M.D. 13,621,829 306,798 Lewis H. Stanton 13,623,584 305,043 Such individuals were elected to serve as directors until the next annual meeting of shareholders and until their successors are elected and qualified. Also at such meeting the shareholders approved the 1998 Stock Option Plan with 3,057,512 votes for the proposal, 1,196,639 votes against and 153,885 votes abstaining. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Class A Common Stock and Class B Warrants are listed on the Nasdaq National Market under the symbols "PLSIA" and "PLSIZ," respectively. Prior to January 6, 1998, we had Class A Warrants outstanding which were listed on the Nasdaq National Market and the symbol "PLSIW," and "Units," each consisting of one share of Class A Common Stock, one Class A Warrant and one Class B Warrant, were listed on the Nasdaq SmallCap Market. The Class A Warrants were redeemed by us pursuant to the terms of the Warrant Agreement on January 6, 1998, and as a result there have been no outstanding Class A Warrants or Units since that date. Trading of our Class A Common Stock and Class B Warrants was suspended by the Nasdaq Stock Market on May 26, 1998, when our former auditors withdrew their audit opinion on the 1997 fiscal year. Trading of our securities on the Nasdaq Stock Market National Market recommenced on October 22, 1998. The following table sets forth, for the calendar quarters indicated, the high and low closing sale prices per share of our Common Stock and Class B Warrants as reported on the Nasdaq National Market.
Class A Class B Common Stock Warrants -------------------- -------------------- Low High Low High --- ---- --- ---- 1997: First Quarter ........................................ 5 3/16 8 1/8 27/32 1 11/16 Second Quarter ....................................... 5 1/4 14 3/4 5 3/4 Third Quarter ........................................ 8 1/2 11 17/32 2 5/16 3 27/32 Fourth Quarter ...................................... 7 3/16 10 1/2 1 3/16 3 1998: First Quarter......................................... 7 11/16 11 11/16 1 5/8 3 7/8 Second Quarter(1)..................................... 4 3/16 10 7/16 25/32 2 7/8 Third Quarter(1)...................................... -- -- -- -- Fourth Quarter(1)..................................... 1 7/8 4 7/16 1/8 13/16 1999: First Quarter......................................... 1 15/16 4 3/16 5/32 1/2 Second Quarter (through June 25, 1999)................ 2 1/16 3 3/8 1/8 11/32 - --------------------
(1) From May 26, 198 to October 22, 1998, the trading in our Class A Common Stock and Class B Warrants was suspended by the Nasdaq Stock Market. On May 22, 1998, the last day prior to suspension of trading, the last reported sale price for our Common Stock and Class B Warrants on the Nasdaq National Market was $4 3/16 and $13/16, respectively. As of June 25, 1999, the approximate number of holders of record of our Common Stock, Class B Warrants, Class E-1 Common Stock and Class E-2 Common Stock were 790, 31, 323 and 323, respectively. There is no public market for our Class E-1 and Class E-2 Common Stock. We have not paid dividends and does not anticipate declaring dividends on our Common Stock in the foreseeable future. 28 ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table contains certain selected consolidated financial data of Premier and is qualified by the more detailed financial statements and notes thereto of Premier included herein. The balance sheet and statement of operations data for the periods ended March 31, 1996, 1997, 1998 and 1999 have been derived from our financial statements, audited by Haskell & White LLP, independent accountants. The balance sheet and statement of operations data for the period ended March 31, 1995 has been derived from our financial statements, audited by Price Waterhouse, LLP, independent accountants. The following information should be read in conjunction with Premier's financial statements and related notes thereto included herein and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report.
FISCAL YEAR ENDED MARCH 31, -------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- -------- (RESTATED) (IN THOUSANDS) SELECTED STATEMENT OF OPERATIONS DATA: Net sales.............................. $ 1,249 $ 1,704 $ 5,091 $ 9,886 $ 13,971 Cost of sales.......................... 1,298 3,324 3,649 17,234 13,405 --------- --------- --------- --------- --------- Gross profit (loss).................... (49) (1,620) 1,442 (7,348) 566 Selling and marketing expenses......... 1,036 1,309 2,415 5,113 7,930 Research and development 1,036 1,214 1,563 3,088 4,165 expenses............................... General and administrative 1,747 1,709 1,853 3,700 6,625 expenses............................... Shareholder litigation settlement expense ............................ -- -- -- -- 8,082 Write-off of investment................ -- -- 881 -- -- Termination of strategic alliance with IBC............................. -- -- 331 -- -- In process research and develop- ment acquired in acquisitions........ -- -- 250 12,800 -- Merger related and integration costs............................... -- -- -- 7,617 -- --------- --------- --------- --------- --------- Loss from operations................... (3,868) (5,852) (5,851) (39,666) (26,236) Interest income (expense), net ....... (322) 99 15 1,074 203 Minority interest in loss of consolidated subsidiary.............. -- -- 60 274 1,764 Discontinued operations................ -- -- (197) (446) (4,692) Extraordinary gains .................. 382 -- -- -- -- --------- --------- --------- --------- --------- Net loss ............................. (3,808) (5,753) (5,973) (38,764) (28,961) Other comprehensive income ........... -- -- -- -- -- --------- --------- --------- --------- --------- Comprehensive loss..................... $ (3,808) $ (5,753) $ (5,973) $(38,764) $(28,961) ========= ========= ========= ========= ========= SELECTED PER SHARE DATA: Loss per share before discontinued operations and extraordinary item(2). $ (1.59) $ (1.26) $ (.99) $ (3.35) $ (1.56) Discontinued operations................ -- -- (.03) (.04) (.30) Extraordinary gain from extinguishment of indebtedness....... 15 -- -- -- -- --------- --------- --------- --------- --------- Net loss per share(1).................. $ (1.44) $ (1.26) $ (1.02) $ (3.39) $ (1.86) ========= ========= ========= ========= ========= Weighted average shares outstanding(2)....................... 2,585 4,557 5,833 11,444 15,531
29
AT MARCH 31, -------------------------------------------------------- 1995 1996 1997 1998 1999 ----- ----- ---- ---- ---- SELECTED BALANCE SHEET DATA: Cash and cash equivalents............ $ 5,888 $ 35 $ 174 $ 9,723 $ 889 Working capital (deficit)............ 6,756 5,18 7,526 19,017 (1,363) Total assets......................... 16,884 15,675 21,079 47,708 19,276 Long-term debt....................... -- -- -- -- -- Shareholders' equity................. 15,002 13,797 16,249 31,456 9,303
(1) The effect on net loss per common share of the conversion of Premier's debentures was to reduce historical net loss by $67,995 and to increase weighted average shares outstanding by 321,099 shares for the fiscal year ended March 31, 1995. Net loss per common share was computed based on the weighted average number of our common shares outstanding during the fiscal year ended March 31, 1995 after giving retroactive adjustment for recapitalization and conversion of debentures outstanding prior to our initial public offering into Units upon completion of our initial public offering. (2) Does not include shares of Class E-1 or Class E-2 Common Stock, which are subject to cancellation in certain circumstances. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE RESULTS DISCUSSED BELOW ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS AND WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH HEREIN, IN THE SECTION ENTITLED "RISK FACTORS" AND ELSEWHERE IN THIS REPORT. GENERAL Premier develops, manufactures and markets several lines of proprietary medical lasers, fiber optic delivery systems, diagnostic imaging systems and associated products for a variety of dental, ophthalmic and surgical applications. Premier commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems, a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets we acquired included the proprietary rights to a broad base of laser and fiber optic technologies developed by Pfizer Laser Systems. This acquisition was led by our current Chief Executive Officer. While we have received FDA clearance to market laser products covering a variety of medical applications, to date we have focused our research, development and marketing efforts on a limited number of products or applications. These applications principally consist of specific dental and more recently, ophthalmic applications. As future resources permit, we may introduce products for applications for which we already have all necessary approvals or may seek strategic alliances to develop, market and distribute these products. We have recorded operating losses in each of the fiscal years since our formation, resulting in large part from substantial sales and marketing and general and administrative expenses, business acquisition costs and costs incurred in research and development activities and in obtaining regulatory approvals. Although sales increased significantly during fiscal 1998, operating results worsened due to the impacts of expensed business acquisition costs and a failed distribution agreement. As discussed in Note 6 to the accompanying financial statements, Premier and several of our officers and directors have been named in a number of securities class action lawsuits which allege violations of the Securities 30 Exchange Act or the California Corporations Code. We have also been named in a shareholders' derivative action. Any significant uninsured judgment or settlement amount associated with these claims would seriously affect our ability to satisfy our working capital requirements. FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998 Our net sales increased 41% to $13,971,000 for the year ended March 31, 1999 ("fiscal 1999") from $9,886,000 for the year ended March 31, 1998 ("fiscal 1998"). This increase was primarily attributable to sales of ophthalmic products manufactured both by us, and by our 51%-owned subsidiary, Ophthalmic Imaging Systems. Our fiscal 1998 net sales included only two months of sales by OIS. Cost of sales decreased 22% to $13,405,000 in fiscal 1999 from $17,234,000 in fiscal 1998. The majority of the decrease is due to the difference between inventory reserves of $7,500,000 recognized during fiscal 1998 associated with the failure of a relationship with dental distributor Henry Schein, Inc., and reserves for additional excess inventory quantities of $2,300,000 recognized during fiscal 1999. Also contributing to the reduction in cost of sales were lower warranty service costs and a decrease in materials scrap expense. Offsetting this reduction were the inclusion of a full year of OIS cost of sales as well as higher manufacturing expenses associated with excess manufacturing capacity during fiscal 1999. Selling and marketing expenses increased 55% to $7,930,000 in fiscal 1999 from $5,113,000 in fiscal 1998. Approximately one-half of the increase was attributable to the selling and marketing expense of OIS, which was included for only two months in fiscal 1998. Other factors which contributed to the increase during fiscal 1999 include substantial growth in trade show and advertising expense associated with our dental and ophthalmic product offerings, as well as increased use of professional advisory services. Research and development expenses increased 35% to $4,165,000 in fiscal 1999 from $3,087,000 in fiscal 1998. Approximately three-fourths of the increase was due to the inclusion of research and development expenses of OIS which were included for only two months in fiscal 1998. The balance of the increase was due to personnel additions, increased clinical costs, and higher consulting services associated with new product development. Substantially offsetting the increase in research and development expense during fiscal 1999 was a reduction in compensation expense for stock options granted to consultants and other non-employees during fiscal 1998 which were subsequently terminated. General and administrative expenses increased 79% to $6,625,000 in fiscal 1999 from $3,700,000 in fiscal 1998. Approximately one-third of the increase was attributable to the general and administrative expense of OIS, which was included for only two months in fiscal 1998. Legal and accounting fees increased substantially during fiscal 1999 as compared to fiscal 1998, rising by approximately $324,000, and $387,000 respectively. These increases resulted from the resignation of our former auditors and the resulting need to have audits performed for two fiscal years, as well as class action litigation and SEC/Nasdaq inquiries that arose during the quarter ended June 30, 1998. Also contributing to the increases in fiscal 1999 as compared to fiscal 1998, were an increase in our provision for bad debts of $405,000 and an increase in compensation expense of $401,000. On November 18, 1998, we reached an agreement in principle with lead plaintiffs and their counsel to settle certain class and derivative action lawsuits which allege violations of the Securities Exchange Act or the California Corporations Code . The plaintiffs seek damages on behalf of classes of investors who purchased our stock between May 7, 1997 and April 15, 1998. Under the terms of the agreement in principle, in exchange for a release of all claims, we would pay 2,250,000 shares of common stock and $4,600,000 in cash. The cash portion of the settlement would be paid by our insurance carrier. Completion of the settlement is subject to the execution of the final settlement agreement, court approval and certain other conditions. In accordance with the terms of the agreement in principle to settle class and derivative actions, we established a reserve during the third quarter of fiscal 1999 for the future issuance of 2,250,000 shares of common stock. The shares were valued at a price of $3.31 per share which was the closing price of our stock on November 18, 1998, the effective date of the proposed settlement agreement. We have included 31 approximately $634,000 of associated legal and professional fees in this reserve for fiscal 1999, but have not included in the reserve approximately $4,600,000 in cash that would be paid by our insurers. In fiscal 1998 we recognized $12,800,000 for in process research and development and $7,617,000 in merger and integration costs related to the acquisitions of 51% ownership in OIS and 100% of EyeSys Technologies, Inc. No business acquisitions have occurred during fiscal 1999. Net interest income decreased by 81% to $203,000 for fiscal 1999 as compared to $1,073,000 for fiscal 1998. The decline in interest income reflects a decrease in excess cash flow available for us to invest during fiscal 1999. The decrease in cash flow was primarily due to increased operating expenses and higher working capital requirements. Approximately $700,000 of the Company's consolidated losses were attributable to the minority shareholder interest of OIS. However 100% of this loss was absorbed by us due to the capital deficiency position of OIS. In March 1999, the board of directors of Data.Site, adopted a plan to discontinue its operations. Accordingly, the results of Data.Site's operations, plus the write-off of $3,511,000 in unamortized goodwill, capitalized software development costs, and equipment have been segregated from continuing operations and reported on a separate line item on the statement of operations and comprehensive loss for fiscal 1999. The statement of operations for fiscal 1998 and fiscal 1997 have been reclassified to present Data.Site's operating results as discontinued operations. Approximately $2,200,000 of the Company's consolidated losses during fiscal 1999 were attributable to the minority interest of Data.Site. Of this amount $400,000 could not be attributed to the minority interest due to the capital deficiency position of Data.Site and was therefore absorbed by us. FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997 Net sales increased 94% to $9,885,000 for the year ended March 31, 1998 ("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal 1997"). This increase was primarily attributable to an increase in sales to the dental market including sales resulting from the introduction of the Er:YAG laser for cavity preparation and ophthalmic sales from the EyeSys product line during the latter half of fiscal 1998. Dental sales during the last two quarters of fiscal 1998 were adversely affected by an impasse reached with dental distributor Henry Schein, Inc. over the nature of a relationship between the parties initiated with a letter of intent executed in December 1997. We believed that Henry Schein obligated itself to accept an initial shipment of product, and that the relationship was being expanded. Henry Schein subsequently notified us that it did not agree with our understanding of the terms of the relationship. Sales during the last two quarters of fiscal 1997 were also adversely affected by a disruption in our supply of Arago argon laser and vendor supply problems with our Multi-Operatory Dentalaser argon laser. Cost of sales increased 372% to $17,234,000 in fiscal 1998 from $3,649,000 in fiscal 1997, due to an increase in sales, excess inventory reserves of $7,500,000 associated with the failure of the Henry Schein relationship, substantially higher warranty costs, and start-up and training expenses associated with Er:YAG laser and fiber and EyeSys product manufacture. Selling and marketing expenses increased 112% to $5,113,000 in fiscal 1998 from $2,415,000 in fiscal 1997. This increase was primarily attributable to significant increases in marketing personnel, introduction of the Er:YAG laser, increased commissions and associated selling expenses, and from consolidation of the expenses of new subsidiaries. 32 Research and development expenses increased 98% to $3,087,000 in fiscal 1998 from $1,563,000 in fiscal 1997. This increase resulted primarily from increases in Premier's research and development personnel, an additional $510,000 of clinical trial costs and associated samples, travel expenditures for Premier and EyeSys, and $710,000 of expense for all other new subsidiaries. The expense in fiscal 1997 was offset by a $450,000 payment received by Premier under a Small Business Innovative Research grant. We also recognized $225,000 and $190,000 as a research and development expense from the issuance of stock options to clinical evaluators and medical directors in fiscal 1998 and fiscal 1997 respectively. General and administrative expenses increased 100% to $3,700,000 in fiscal 1998 from $1,853,000 in fiscal 1997. This increase was partially due to $459,000 of expenses from new subsidiaries, $400,000 for litigation expense related to a supply agreement for optical fibers, and $250,000 for issuance of stock options. Net interest income increased to $1,073,000 in fiscal 1998 from $15,000 in fiscal 1997. This increase reflected our higher cash balances following the completion of our secondary offering in October 1996 and the exercise of outstanding warrants in January 1998. The net proceeds from these capital stock transactions were $10,401,000 from the secondary offering and $41,735,000 from the warrant exercises. In fiscal 1998, Premier expensed $12,800,000 for in process research and development and $7,617,000 in merger and integration costs related to the acquisitions of 51% ownership in OIS and 100% of EyeSys. Approximately $180,000 of losses were attributable to the minority shareholder interest of OIS. However 100% of the loss was absorbed by Premier due to the capital deficiency position of OIS. We recorded $349,000 of losses attributable to our minority shareholder interest of Data.Site compared with $60,000 during 1997. In summary, the operating results for 1998 were negatively impacted by $20,417,000 of acquisition expenses (including $16,500,000 of non-cash costs), $7,500,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of non-cash stock option expense, bad debt expense of $600,000, and litigation costs of $400,000. LIQUIDITY AND CAPITAL RESOURCES Our operations have been financed through the proceeds from the sale of our equity securities, including an initial public offering in December 1994, and a secondary public offering in October 1996, the exercise of publicly traded warrants and stock options, revenues from operations, and proceeds from a Small Business Innovative Research Grant. Further, in May of 1999, we received $2 million in gross proceeds from a private offering and sale of convertible debentures and will receive an additional $2 million in gross proceeds from this financing upon the effectiveness of this registration statement. The net proceeds of this financing will be used for working capital requirements. In connection with this financing, we granted to the lenders a security interest in substantially all of our assets, including without limitation our patents and other intellectual property. Our principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of ophthalmic, dental and surgical sales forces, the development of marketing programs and the acquisition and/or licensing of patents. At March 31, 1999, we had unrestricted cash and short-term investments of $889,000 and a working capital deficit of $1,363,000. The decrease in cash and short-term investments since March 31, 1998 was primarily the result of the losses during fiscal 1999, increased by working capital changes during the period, including the continued receipt of inventory purchases commitments that had been made during the prior fiscal year. Cash flow during fiscal 1997 and 1998 was positive as the net result of cash proceeds from equity offerings and exercise of stock options and warrants, reduced by operating requirements and investing activities associated with new business acquisitions. 33 Our future capital requirements will depend on many factors, including: o the progress of our research and development activities o the scope and results of pre-clinical studies and clinical trials o the costs and timing of regulatory approvals o the rate of technology advances o competitive conditions within the medical laser industry o the maintenance of manufacturing capacity o the outcome of the class action lawsuits o the establishment of collaborative marketing and other relationships which may either involve cash infusions to us, or require additional cash from us. Our ability to meet our working capital needs will depend on our ability to achieve sales targets, profitability and a positive cash flow from operations. We cannot assure you that we will be able to achieve sales targets, profitable operations or a positive cash flow from operations. We believe that our present liquid assets and cash to be generated through the operation of our business will be sufficient to meet our working capital requirements through at least March 31, 2000. Any significant uninsured settlement or judgment associated with the class action litigation would materially adversely affect our ability to satisfy our working capital requirements. If additional capital is required, we would consider several financing alternatives including the issuance of securities, licensing of technology and marketing rights, and/or bank financing. We cannot assure you that we would be successful in obtaining additional financing. At March 31, 1999, we had net operating loss carryforwards for federal income tax purposes totaling approximately $55 million which will begin to expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in stock ownership. Utilization of our net operating loss carryforwards to offset future income may be limited. GOVERNMENT GRANTS We have been awarded a SBIR grant for approximately $750,000 for the study of laser cataract emulsification. Substantially all of this grant has been drawn for such purposes. The remaining $50,000 of the grant can be drawn upon the achievement of specified criteria. YEAR 2000 ISSUES During the quarter ended September 30, 1998, we upgraded our computerized accounting system to a release that is compliant with Year 2000 dating sensitivities. The costs of this upgrade were minimal. We have not prepared a formal assessment of the internal and external Year 2000 issues that would have a significant impact on our products. Our laser products are not date sensitive. Diagnostic products, on the other hand, contain date sensitive data bases. Our software engineers are developing new software to be available by mid-1999 which will address the Year 2000 dating issues. The costs of software modification are not expected to be material. Any diagnostic products currently in the market that are covered by a warranty will be upgraded at no charge to the customer at an insignificant cost to the company. We plan to charge upgrade fees for previously sold products that are outside of the warranty period. We expect that our existing warranty reserves will be adequate to absorb the upgrade costs. 34 SEASONALITY To date, our revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year-end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this item are included in Part IV, Item 14 of this Form 10-K and are presented beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On June 1, 1998, we filed a Current Report on Form 8-K, reporting a change in our certifying accountant. This Current Report was amended on June 15, 1998. In connection with the resignation of our former accountants, there was a disagreement between us and our former accountants concerning certain accounting matters. Reference is hereby made to such Current Reports for further discussion of this matter. On June 22, 1998, we engaged the firm of Haskell & White LLP as our certifying accountant. The engagement of Haskell & White LLP was reported in a Current Report on Form 8-K filed June 26, 1998. 35 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT. Our directors and executive officers and their ages as of March 31, 1999 are as follows:
NAME Age Position ---- --- -------- Colette Cozean, Ph.D.(1)............... 41 Chairman of the Board, Chief Executive Officer, President and Director Robert V. Mahoney...................... 57 Vice President, Finance and Chief Financial Officer Tom Hazen.............................. 57 Executive Vice President, Operations Judith A. McCall....................... 58 Vice President, Human Resources, Administration and Special Projects and Secretary Jeffrey A. Anderson.................... 32 Vice President, Regulatory Affairs and Quality Assurance Lawrence D. Ashcroft(2)(3)............. 70 Director Patrick J. Day......................... 72 Director Fredric J. Feldman, Ph.D.(2)(3)........ 59 Director John Hunkeler, M.D., F.A.C.S.(2)....... 57 Director G. Lynn Powell, D.D.S.(2).............. 57 Director Lewis H Stanton(3)..................... 45 Director - ----------------------------
(1) We are presently in the process of seeking additional management personnel, including a new Chief Executive Officer. Under our current plans, if we are able to hire a new Chief Executive Officer, Dr. Cozean will retain her positions as Director of Research and Chairman. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. All directors hold office until the next Annual Meeting of Shareholders or the election and qualification of their successors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The business experience, principal occupations and employment, as well as periods of service, of each of our directors and executive officers during at least the last five (5) years are set forth below. COLETTE COZEAN, PH.D. is a founder of Premier and has been its Chairman of the Board of Directors, President and Director of Research since it commenced operations in August 1991 and became the Chief Executive Officer in 1994. From April 1987 to August 1991, Dr. Cozean served as Director of Research and Development, Regulatory Affairs and Clinical Programs at Pfizer Laser Systems, a division of Pfizer Hospital Products Group, Inc. and in these capacities managed the development of the laser technologies which we acquired from Pfizer Laser Systems. Prior to April 1987, Dr. Cozean held various research positions at Baxter Edwards, a division of Baxter Healthcare Corporation, and American Technology and Ventures, a division of American Hospital Supply Company. Baxter Healthcare Corporation and American Hospital Supply Company are manufacturers and suppliers of advanced medical products. Dr. Cozean holds several patents, has published many articles and has served as a member of the National Institutes of Health grant review committee. Dr. Cozean received a Ph.D. in biomedical engineering and an M.S. in Electrical Engineering from Ohio State University, a B.S. in biomedical engineering from the University of Southern California, and a B.A. in physical sciences from Westmont College. 36 JEFFREY A. ANDERSON has been Vice President, Regulatory Affairs and Quality Assurance since September 1997 when he joined Premier. Prior to that time and since November 1995, Mr. Anderson had served as Regulatory Affairs Manager of Medtronic. From December 1993 to November 1995, Mr. Anderson served as Regulatory Affairs Specialist of Sybron Dental Specialties and from December 1991 to December 1993, he served as Regulatory Affairs/Quality Assurance Manager of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in Physics from California State University Fullerton. TOM HAZEN has been the Executive Vice President, Operations of Premier since October 1997. Prior to joining Premier and since 1992, Mr. Hazen served as Vice President of Operations of Imagyn Medical, Inc. In addition, Mr. Hazen has served in various executive offices with several companies in the medical field specializing in product development and manufacturing. These positions include Vice President Operations at MICA Technology Services in Buffalo Grove, Illinois and President and Chief Executive Officer of California based Dolphin Imaging Systems. Mr. Hazen received a BSME degree from the University of Arizona and an MBA from UCLA. ROBERT V. MAHONEY joined Premier in December 1998 as the Chief Accounting Officer, and became Chief Financial Officer and Executive Vice President-Finance in January 1999. Before then and since February 1997, Mr. Mahoney served as Director, Strategy and New Ventures of Tandem Computers, Inc. From August 1996 until November 1996, Mr. Mahoney was an employee of Superstill Technology, Inc. Before his employment at Superstill Technology, from January 1996 until July 1996, Mr. Mahoney served as the Chief Financial Officer and Senior Vice President, Finance of Interactive Network, Inc. Mr. Mahoney received a MBA from Stanford University and holds a B.S. in Public Policy from the United States Air Force Academy. JUDITH A. MCCALL has been with Premier since April 1993 and became Vice President, Human Resources, Administration and Special Projects and Secretary in January 1998. For the past three years, Ms. McCall has headed our human resources department. Prior to joining Premier, Ms. McCall held various senior operations and administrative positions with firms in Southern California and served as Director of Training and Development for API Security. Ms. McCall received a M.A. in Marriage, Family and Child Psychology from Azusa Pacific College in Azusa, California and a B.A. in Christian Education from St. Andrews Presbyterian College in Lauringburg, North Carolina. LAWRENCE D. ASHCROFT joined the board of directors in December 1998. Mr. Ashcroft has held a number of senior management and directorial posts in both the United States and Europe. Before his retirement, from 1988 to 1995, Mr. Ashcroft served as Chairman of the Board of Directors of Cardiopet, Inc., a company which specialized in reading animal electrocardiograms worldwide via telephone. Mr. Ashcroft currently serves on the board of directors of Leading Edge Technologies and is a non-executive director of Tatatech Inc., Westergaard Broadcasting Inc. and Comstock and Madison Systems Inc. PATRICK J. DAY has served as a director of Premier since August 1991. Mr. Day is a Certified Public Accountant and owns a CPA firm which he established in 1967. Mr. Day has served as a director for several organizations including the First Presbyterian Church of Hollywood and many private companies. Mr. Day is the father of Dr. Cozean, our Chairman of the Board and President. Mr. Day received a B.A. in accounting from the University of Idaho. FREDRIC J. FELDMAN, PH.D. joined the board of directors in December 1998. Dr. Feldman has been a consultant to start up healthcare companies, investment banks and venture capital groups since 1992. Before and during that period, Dr. Feldman served as Chief Executive Officer of Biex, Inc., a company specializing in womens' health; as Chief Executive Officer and Chairman of the Board of Directors of Oncogenetics, Inc., a cancer diagnostics company; and as President and Chief Executive Officer of Microgenics Corporation, a biotechnology company. Currently, Dr. Feldman serves as a director for Ostex 37 International, Inc., SangStat Medical Corporation and Orthologic Corp. and several private companies. Dr. Feldman received a Ph.D. in Analytical Chemistry and a M.S. in Inorganic Chemistry from the University of Maryland and a B.S. in Chemistry from the City University of New York. JOHN D. HUNKELER, M.D., F.A.C.S. joined the board of directors in December 1998. Dr. Hunkeler is a board certified ophthalmologist who has been in private practice in Kansas City, Missouri since 1973. He is also a professor and Chairman of the Department of Ophthalmology at the University of Kansas Medical Center, the President of Hunkeler Eye Centers and the former President of the American Society of Cataract and Refractive Surgery. Dr. Hunkeler is the former Medical Director and Vice President of the Kansas City Eye Bank. Dr. Hunkeler holds a B.A. from Harvard College and received his medical degree from the University of Kansas in 1967. G. LYNN POWELL, D.D.S. joined the board of directors in January 1997. Dr. Powell has been on the faculty at the University of Utah since 1982, where he currently serves as the Assistant Dean for Dental Education in the School of Medicine and Professor in the Department of Pathology. He is a patent holder who has performed extensive research in the field of dentistry serving as primary investigator on several funded grants and is author or co-author of over 45 papers in journals, a majority of which relate to the use of lasers in dentistry. He serves as a reviewer for three dental and laser journals, has lectured nationally as well as internationally, and routinely presents his work at research meetings. Dr. Powell is the current President of the International Society for Lasers in Dentistry. Dr. Powell received his D.D.S. from the University of Washington and was on the full time faculty in Restorative Dentistry at that institution for ten years. LEWIS H. STANTON joined the board of directors in December 1998. Mr. Stanton has been the Executive Vice President, Chief Operating Officer and Chief Financial Officer of MAI Systems Corporation since he joined that company in 1997. From 1996 until he joined MAI Systems in 1997, Mr. Stanton was the President of Stanton & Associates, a consulting company. From September 1996 until January 1997, Mr. Stanton served as acting Chief Executive Officer of Worldwide Networks, Inc., an Internet access provider. From 1988 until 1996, Mr. Stanton served as Chief Financial Officer of Data Analysis Inc., the parent company of Investor's Business Daily, a national daily newspaper; William O'Neal & Co. Inc., an institutional research firm and database company; and other companies. From 1976 until 1988, Mr. Stanton was with the international accounting firm Arthur Andersen & Co., specializing in financial services. Mr. Stanton is a member of the AICPA and was chair of the California Society of CPAs, Los Angeles, Members in Industry Committee for four years. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, and the regulations thereunder, require our directors, executive officers and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our and other equity securities, and to furnish us with copies of all Section 16(a) forms which they file. During the fiscal year ended March 31, 1999, all reports required to be filed pursuant to section 16(a) of the Exchange Act were filed on a timely basis. During the fiscal year ended March 31, 1998, Jeffrey A. Anderson, J. Randy Alexander and Judith A. McCall, each one of our executive officers, failed to file on a timely basis an Initial Statement of Beneficial Ownership of Securities on Form 3. During the fiscal year ended March 31, 1998, Tom Hazen, also an executive officer, and Patrick J. Day, one of our directors, failed to file on a timely basis, a Statement of Changes of Beneficial Ownership on Form 4. 38 To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the two (2) fiscal years ended March 31, 1999 and 1998, all other Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth information concerning compensation paid to our Chief Executive Officer and each other executive officer who received an annual salary and bonus of more than $100,000 for services rendered to us during the fiscal year ended March 31, 1998.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION(1) ------------------- FISCAL ----------------------- SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION --------------------------- ---- ------ ----- ------------------ ------------ Colette Cozean, Ph.D., President, 1999 $250,000 $25,000 0 $38,950(2) Chief Executive Officer and 1998 $165,000 $100,000 1,000,000 $16,704(3) Director of Research 1997 $151,064 -- 217,500 $32,300(4) Tom Hazen, Executive Vice 1999 $150,000 $20,000 0 -- President, Operations - ---------------------
(1) Excludes perquisites and other personal benefits, securities and properties otherwise categorized as salary or bonuses which in the aggregate, for each of the named persons did not exceed the lesser of either $50,000 or 10% of the total annual salary reported for the person shown above. We have entered into Termination Agreements with the above executive officers which provide that in the event of a termination of employment following a change in control of Premier, as defined in this agreement, the named executive officer will receive (i) a lump sum cash payment equal to two times the highest annual level of total cash compensation paid to that officer during the three (3) calendar years prior to the termination; (ii) immediate vesting of all previously granted stock options; and (iii) continuing health benefits for a period of twenty-four (24) months. We have also entered into Employment Agreements with each of the named persons which provide for two to four (4) months of severance benefits upon their termination of employment. Based upon salary levels as of March 31, 1999, these severance benefits would be approximately $83,334 for Dr. Cozean and $37,500 for Mr. Hazen. (2) Represents $32,500 of premiums incurred by us for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance of $6,450. (3) Represents $5,000 of premiums paid by us for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance of $11,704. (4) Represents $27,500 of premiums paid by us for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance of $4,800. OPTIONS GRANTED IN LAST FISCAL YEAR During the fiscal year ended March 31, 1999, we did not grant any stock options to either of the executive officers named in the Summary Compensation Table above. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES The following table provides information regarding stock options exercised by the named executive officers during the fiscal year ended March 31, 1999, as well as the number of exercisable and unexercisable in-the-money stock options and their values at fiscal year-end. An option is in-the-money if the fair market value for the underlying securities exceeds the exercise price of the option. 39
Value of Number of Unexercised In-the- Unexercised Options Money Options at Shares at March 31, 1999 March 31, 1999(1) Acquired Value -------------------- -------------------- on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable ----------- -------- ------------------------- ------------------------- Colette Cozean, Ph.D.............. 0 0 1,043,650/1,716,150 $0/$0 Tom Hazen ........................ 0 0 50,000/150,000 $0/$0 - --------------------
(1) Represents the Nasdaq Stock Market last sale price of underlying securities at fiscal year end, minus the exercise price of the options. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended March 31, 1999, the members of the compensation committee were Dr. Feldman, Dr. Hunkeler, Dr. Powell and Mr. Ashcroft, all of whom are non-employee directors of Premier. No member of the compensation committee has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity. COMPENSATION COMMITTEE REPORT TO SHAREHOLDERS The Compensation Committee of the Board of Directors (the "Committee") establishes the compensation level for the Company's Chief Executive Officer ("CEO") and other executive officers based upon the Committee's discretion, taking into account factors it deems appropriate, such as competitive factors, attainment of established Company financial performance criteria and individual performance goals and the implementation of key strategic programs and products. The Compensation Committee believes that the compensation programs for the Company's executive officers should reflect the Company's performance and the value created for the Company's shareholders. In addition, the compensation programs should support the short-term and long-term strategic goals and values of the Company and should reward individual contributions to the Company's success. The Company is engaged in a very competitive industry, and the Company's success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers to such individuals. The Compensation Committee's policy is to provide the Company's executive officers with compensation opportunities that are based upon their personal performance, the financial performance of the Company and their contribution to that performance, and that are competitive enough to attract and retain highly skilled individuals. Compensation for the CEO for fiscal 1999, as reported above, was based on the Committee's analysis of the Company's financial performance and achievement of strategic objectives, and the CEO's contribution to this performance and these achievements. The Company's policy is not to disclose target levels with respect to specific quantitative or qualitative performance-related factors, or factors considered to involve confidential business information, because their disclosure would have an adverse effect on the Company. Qualification of compensation under Section 162(m) of the Internal Revenue Code requires that compensation be "performance based" and that the shareholders of the Company approve the material terms of the compensation plan. The Company can deduct compensation paid (or deemed paid) to each named executive officer in the tax year concerned to the maximum amount of $1,000,000 unless additional compensation qualifies for deductibility under Section 162(m). 40 Based on its review of all of the factors described above, the Committee has determined that salaries for the Company's executive officers will be maintained at their fiscal 1999 levels except that Jeff Anderson, our VP, Regulatory Affairs and Quality Assurance, received a 33% raise. All amounts paid or accrued during fiscal 1999 under the above described plans and programs are included in the tables above. COMPENSATION COMMITTEE: Fredric J. Feldman, Ph.D., Chairman Lawrence D. Ashcroft John D. Hunkeler, M.D., F.A.C.S. G. Lynn Powell, D.D.S. 41 COMPARISON OF CUMULATIVE TOTAL RETURN ON ONE OR MORE COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS [Data below represented as a graph here]
FISCAL YEAR ENDING --------------------------------------------------------------------------------- 11/30/94 3/31/95 3/31/96 3/31/97 3/31/98 3/31/99 -------- ------- ------- ------- ------- ------- COMPANY/INDEX/MARKET Premier Laser Systems 100.00 80.00 172.50 110.00 210.00 46.88 Electromedical Equipment 100.00 116.74 190.35 171.13 242.41 302.03 NASDAQ Market Index 100.00 103.04 138.60 155.06 234.33 306.23 Note: Base price date is 11/30/94.
42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of June 25, 1999, regarding the beneficial ownership of the Company's Common Stock by: (i) all persons known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each director and executive officer of the Company, and (iii) all directors and executive officers as a group. The following table treats the Common Stock, the Class E-1 Common Stock and the Class E-2 Common Stock as a single class.
Amount and Nature of Percent of Name and Address Beneficial Common of Beneficial Owner(1) Ownership Stock - ---------------------- ----------- ----- Colette Cozean, Ph.D.(2).......................... 1,187,145 6.4% Patrick J. Day(3)................................. 269,933 1.5% G. Lynn Powell, D.D.S.(4)......................... 91,501 * Lawrence D. Ashcroft (5).......................... 10,000 * Fredric J. Feldman, Ph.D.(5)...................... 10,000 * John D. Hunkeler, M.D., F.A.C.S.(5)............... 10,000 * Lewis H. Stanton (5).............................. 10,000 * Robert V. Mahoney (6)............................. 17,308 * Tom Hazen (7)..................................... 52,006 * Jeffrey Anderson (8).............................. 42,551 * Judith A. McCall(9)............................... 85,696 * All directors and executive officers as a group (11 persons)(10).......................... 1,786,140 9.4% - ------------------ * Less than 1%.
(1) The address of each of the individuals listed (other than the selling shareholders) is 3 Morgan, Irvine, California 92618. Unless otherwise noted, we believe that all persons named in the table have sole investment and voting power with respect to all shares of Class A Common Stock beneficially owned by such person, such shares, subject to community property laws where applicable. (2) Includes 52,049 shares of Class A Common Stock, 43,514 shares of Class E-1 Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr. Cozean and 1,594 shares of Class A Common Stock, 1,412 shares of Class E-1 Common Stock and 1,412 shares of Class E-2 Common Stock held by Dr. Cozean as custodian for her two minor children. Also includes 1,043,650 of Class A Common Stock subject to options exercisable within 60 days. (3) Includes 54,263 shares of Class A Common Stock, 24,023 shares of Class E-1 Common Stock and 24,023 shares of Class E-2 Common Stock. Also includes 133,992 shares of Class A Common Stock, 16,816 shares of Class E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to warrants and options exercisable within 60 days. (4) Includes 91,501 shares of Class A Common Stock subject to warrants and options exercisable within 60 days. (5) Consists of 10,000 shares of Class A Common Stock subject to options exercisable within the next 60 days. (6) Consists of 17,308 shares of Class A Common Stock subject to options exercisable within 60 days. 43 (7) Includes 2,006 shares of Class A Common Stock and 50,000 shares of Class A Common Stock subject to options exercisable within 60 days. (8) Includes 885 shares of Class A Common Stock and 41,666 shares of Class A Common Stock subject to options exercisable within 60 days. (9) Includes 1,339 shares of Class A Common Stock and 84,357 shares of Class A Common Stock subject to options exercisable within 60 days. (10) Includes 112,136 shares of Class A Common Stock, 68,949 shares of Class E-1 Common Stock and 68,949 shares of Class E-2 Common Stock. Also includes 1,502,474 shares of Class A Common Stock, 16,816 shares of Class E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to warrants and options exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On April 3, 1999, our board of directors extended the expiration date of an option to purchase 4,522 shares of common stock until April 22, 2000. The options had previously been granted to T. Daniel Caruso and were subsequently inherited by his widow. In December 1998, we granted options to purchase 40,000 shares of common stock to three newly elected directors: Dr. Feldman, Dr. Hunkeler and Mr. Stanton. In January 1999, we granted an option to purchase 40,000 shares of common stock to Mr. Ashcroft when he came on the board. All of these options vest over four years beginning on March 31, 1999. These options have an exercise price of $2.00 per share, the fair market value of our common stock on the date of grant. In January 1999, we also granted an option to purchase 225,000 shares of common stock with an exercise price of $1.906 per share to Mr. Robert Mahoney, our Chief Financial Officer. In fiscal 1998, we issued options to purchase the following numbers of shares to certain of its directors: (1) Colette Cozean - 1,000,000 shares vesting over 5 years; (2) Patrick J. Day, Grace Ching - Hsin Lin, G. Lynn Powell, and E. Donald Shapiro - 40,000 shares each vesting over 4 years. All of these options have an exercise price of $7.98 per share, the fair market value of our common stock on the date of grant. In addition to the above, Mr. Shapiro and Dr. Powell were each granted options to purchase 30,000 shares at $10.31 per share vesting over 3 years in connection with services rendered by them. All of the above options have a term of ten years. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page in Annual Report on Form 10-K ------------ (a) The following documents are filed as part of this Annual Report on Form 10-K. (1) Report of Haskell & White LLP, Independent Auditors................................. F-2 Consolidated Balance Sheets at March 31, 1999 and 1998...............................F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 1999, 1998 and 1997....................................F-4 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999, 1998 and 1997..................................................F-5 44 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997........................................................F-7 Notes to Consolidated Financial Statements...........................................F-9 (2) Financial Statements Schedules Schedule II-Valuation and Qualifying Accounts for the Years Ended March 1999, 1998 and 1997.....................................................F-27 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)...................................................................... 45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Agreement and Plan of Merger dated as of April 24, 1997 among the Registrant, EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, Registration No. 33-29573). 2.2 First Amendment to Agreement and Plan of Merger dated as of August 6, 1997, among the Registrant, EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.2 to the Registrant's Current Report of Form 8-K filed October 15, 1997). 2.3 Second Amendment to Agreement and Plan of Merger dated as of September 16, 1997 among the Registrant, EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc., EyeSys Technologies, Inc. and Premier Acquisition of Delaware, Inc. (incorporated herein by this reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed October 15, 1997). 2.4 Stock Purchase Agreement dated February 25, 1998 between the Registrant and Ophthalmic Imaging Systems (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.5 Purchase Agreement dated February 25, 1998 between the Registrant and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated herein by this reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 2.6 Purchase Agreement dated February 25, 1998 between the Registrant and Stanley Chang, M.D. (incorporated herein by this reference to Exhibit 99.8 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 45 Exhibit - ------- 2.7 Purchase Agreement dated February 25, 1998 between the Registrant and J.B. Oxford & Company (incorporated herein by this reference to Exhibit 99.12 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of state on November 23, 1994 (incorporated herein by this reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1994). 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser Systems, Inc. and American Stock Transfer and Trust Company acting as rights agent (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed April 2, 1998). 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Registrant, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 1.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.2 Assignment Agreement dated July 27, 1992 between the Registrant and Michael Colvard, M.D. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.3 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.4 Letter of Intent between the Registrant and Richard Leaderman, D.D.S., together with related Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.5 Exclusive Marketing Agreement dated July 26, 1994 between the Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.6 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.7 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No. 33- 83984). 10.8 Form of Warrant Agreement (including forms of Class B Warrant Certificates) (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.9 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 46 Exhibit - ------- 10.10 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the Registrant's Registration statement on Form SB-2, Registration No. 33-83984). 10.11 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.12 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University, together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.13 Industrial Lease dated December 6, 1995 between the Registrant and The Irvine Company (incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.14 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.15 Form of Termination Agreement between the Registrant and certain of the Registrant's executive officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.16 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.17 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.18 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.19 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.20 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.21 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-04219). 10.22 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 47 Exhibit - ------- 10.23 Operating Agreement of Data.Site dated January 31, 1997 (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.24 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of Delaware, Inc. and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.25 1997 Stock Option, together with form of Nonqualified Stock Option Agreement (incorporated herein by the reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K filed August 26, 1998). 10.26 1998 Stock Option Plan (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed August 26, 1998). 10.27 Rights Agreement dated March 31, 1998 between the Registrant and American Stock Transfer and Trust Company (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed April 2, 1998). 10.28 Secured Convertible Debenture Purchase Agreement dated May 17, 1999 between the Registrant and the investors signatory thereto.* 10.29 Registration Rights Agreement dated May 17, 1999 between the Registrant and the investors signatory thereto.* 10.30 Warrant dated May 17, 1999 issued by the Registrant to certain investors.* 10.31 Intellectual Property Security Agreement dated May 17, 1999 between the Registrant and the secured parties signatory thereto.* 10.32 Security Agreement dated May 17, 1999 between the Registrant and the secured parties signatory thereto.* 10.33 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued by the Registrant to certain investors.* 16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated herein by this reference to Exhibit 16 to the Registrant's Current Report on Form 8-K filed June 1, 1998, and as amended June 15, 1998). 21 Subsidiaries (incorporated herein by this reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998). 23.1 Consent of Haskell & White LLP.* 27 Financial Data Schedule.* 99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Current Report on From 8-K filed March 9, 1998). 48 Exhibit - ------- 99.2 Class D Warrant dated February 25, 1998 issued by the Registrant to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.6 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.3 Registration Rights Agreement dated February 25, 1998 issued by the Registrant and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 997 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.4 Class D Warrant dated February 25, 1998 issued by the Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.10 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.5 Registration Rights Agreement dated February 25, 1998 issued by Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein by this reference to Exhibit 99.11 to the Registrant's Current Report on Form 8-K filed March 9, 1998). 99.6 Class D Warrant dated February 25, 1998 issued by the Registrant to J.B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.14 to the Registrant's Current Report on From 8-K filed March 9, 1998). 99.7 Registration Rights Agreement dated February 25, 1998 between the Registrant and J. B. Oxford & Company (OIS transaction) (incorporated herein by this reference to Exhibit 99.18 to the Registrant's Current Report on Form 8-K filed March 9, 1998). +99.8 Agreement dated July 23, 1997 between Nidek Co., Ltd. and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). +99.9 Exclusive Distribution Agreement dated June 2, 1997 between EyeSys Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by this reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-4 Registration No. 333-29573). - -------------------- * Filed herewith. + Confidential treatment has been granted with respect to portions of this Exhibit. (b) Financial Statement Schedules. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIER LASER SYSTEMS, INC. By: /s/ Colette Cozean ------------------------------------- Colette Cozean, Ph.D., Chief Executive Officer and President 50 POWER OF ATTORNEY We, the undersigned officers and directors of Premier Laser Systems, Inc., do hereby constitute and appoint Colette Cozean, Ph.D., and Robert V. Mahoney, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date - --------------------------- -------------------------------- --------------- /S/ COLETTE COZEAN PH. D. Chairman of the Board, President June 26, 1999 - --------------------------- and Chief Executive Officer Colette Cozean, Ph.D. (Principal Executive Officer) /S/ ROBERT V. MAHONEY Executive Vice President, Finance June 26, 1999 - --------------------------- and Chief Financial Officer Robert V. Mahoney (Principal Financial Officer and Principal Accounting Officer) /S/ LAWRENCE D. ASHCROFT Director June 26, 1999 - --------------------------- Lawrence D. Ashcroft /S/ PATRICK J. DAY Director June 25, 1999 - --------------------------- Patrick J. Day /S/ FREDRIC J. FELDMAN, PH.D. Director June 26, 1999 - --------------------------- Fredric J. Feldman, Ph. D. Director _________, 1999 - --------------------------- John Hunkeler, M.D. /S/ G. LYNN POWELL, D.D.S. Director June 28, 1999 - --------------------------- G. Lynn Powell, D.D.S. /S/ LEWIS H. STANTON Director June 28, 1999 - --------------------------- Lewis H. Stanton
51 INDEX TO FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors F-2 Consolidated Balance Sheets at March 31, 1999 and 1998 F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 1999, 1998, and 1997 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 1998, and 1997 F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998, and 1997 F-7 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Premier Laser Systems, Inc. We have audited the accompanying consolidated balance sheets of Premier Laser Systems, Inc. (the Company) as of March 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included the financial schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2, the Company has restated its previously issued 1997 consolidated financial statements. In our opinion, the 1999, 1998, and 1997 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. HASKELL & WHITE LLP Newport Beach, California June 9, 1999 F-2 PREMIER LASER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, ------------------------------------ ASSETS 1999 1998 --------------- --------------- Current assets: Cash and cash equivalents $ 888,767 $ 9,722,514 Short-term investments - 9,666,918 Restricted cash 50,000 2,150,000 Accounts receivable, net of allowance for doubtful accounts and sales returns of $1,997,158 and $1,224,845, respectively 1,342,917 4,952,892 Inventories, net 5,797,054 4,482,698 Prepaid expenses and other current assets 531,459 2,528,996 --------------- --------------- Total current assets 8,610,197 33,504,018 Property and equipment, net 1,473,420 1,778,423 Intangible assets, net 9,170,360 11,991,679 Other assets 21,953 434,300 --------------- --------------- Total assets $ 19,275,930 $ 47,708,420 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,802,606 $ 5,510,692 Line of credit 70,470 2,068,163 Accrued compensation and related costs 968,969 964,691 Other accrued liabilities 5,130,951 5,943,685 --------------- --------------- Total current liabilities 9,972,996 14,487,231 --------------- --------------- Commitments and contingencies (Notes 5, 6, 9, and 10) Minority interest - 1,764,736 --------------- --------------- Shareholders' equity: Preferred stock, no par value: Authorized shares - 8,850,000 Issued and outstanding shares - none - - Common stock, Class A, no par value: Authorized shares - 35,600,000 Issued and outstanding shares - 16,962,278 including 2,250,000 subject to issuance for shareholder litigation settlement at March 31, 1999, and 14,649,421 at March 31, 1998 90,354,340 83,546,913 Common stock, Class E-1, no par value: Authorized shares - 2,200,000 Issued and outstanding shares - 1,257,461 at March 31, 1999 and 1998 4,769,878 4,769,878 Common stock, Class E-2, no par value: Authorized shares - 2,200,000 Issued and outstanding shares - 1,257,461 at March 31, 1999 and 1998 4,769,878 4,769,878 Warrants and options 1,723,842 1,723,842 Accumulated deficit (92,315,004) (63,354,058) --------------- --------------- Total shareholders' equity 9,302,934 31,456,453 --------------- --------------- Total liabilities and shareholders' equity $ 19,275,930 $ 47,708,420 =============== ===============
See accompanying notes. F-3 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED MARCH 31, ---------------------------------------------------------------- 1999 1998 1997 (Restated) ----------------- ----------------- ------------------ Net sales $ 13,971,085 $ 9,885,569 $ 5,090,861 Cost of sales 13,405,182 17,234,288 3,648,539 ----------------- ----------------- ------------------ Gross profit (loss) 565,903 (7,348,719) 1,442,322 Selling and marketing expenses 7,930,444 5,113,080 2,415,010 Research and development expenses 4,164,919 3,087,360 1,563,228 General and administrative expenses 6,625,247 3,699,541 1,852,948 Shareholder litigation settlement expenses 8,081,770 - - Write off of investment in Mattan Corporation - - 881,010 Termination of strategic alliance with IBC - - 331,740 In process research and development acquired in connection with business acquisitions - 12,800,000 250,000 Merger related and integration costs - 7,616,924 - ----------------- ----------------- ------------------ Loss from operations (26,236,477) (39,665,624) (5,851,614) Interest income, net 202,877 1,073,493 15,493 Minority interest in loss of consolidated subsidiaries 1,764,736 273,811 60,000 ----------------- ----------------- ------------------ Loss from continuing operations (24,268,864) (38,318,320) (5,776,121) ----------------- ----------------- ------------------ Discontinued operations: Loss from discontinued operations (1,180,622) (445,967) (197,236) Loss on disposal of discontinued operations (3,511,460) - - ----------------- ----------------- ------------------ (4,692,082) (445,967) (197,236) ----------------- ----------------- ------------------ Net loss (28,960,946) (38,764,287) (5,973,357) Items of other comprehensive income (loss) - - - ----------------- ----------------- ------------------ Comprehensive loss $ (28,960,946) $ (38,764,287) $ (5,973,357) ================= ================= ================== Basic and diluted net loss per share: Loss from continuing operations $ (1.56) $ (3.35) $ (.99) Loss from discontinued operations (.30) (.04) (.03) ----------------- ----------------- ------------------ Net loss per share $ (1.86) $ (3.39) $ (1.02) ================= ================= ================== Weighted average number of shares used in computation of basic and diluted net loss per share 15,531,400 11,444,123 5,833,326 ================= ================= ==================
See Accompanying notes. F-4 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Common Stock Common Stock Common Stock Class A Class E-1 Class E-2 ------------------------- ----------------------- ----------------------- Class A Shares Amount Shares Amount Shares Amount Warrants ---------- ------------ --------- ----------- --------- ----------- ----------- Balance at March 31, 1996 4,702,203 $ 16,317,376 1,256,818 $ 4,769,878 1,256,818 $ 4,769,878 $ 2,321,057 Common stock and B warrants issued in connection with secondary public offering 2,403,500 9,363,298 - - - - - Common stock issued in connection with the formation of the Data.Site joint venture 159,787 1,200,000 - - - - - Exercise of stock options and warrants 48,351 249,774 360 - 360 - (25,729) Stock options issued to Advisory Board members, clinical evaluators, medical directors, and other consultants - 190,001 - - - - - Decrease in unrealized holding gain on short-term investments - - - - - - - Net loss for the year (restated) - - - - - - - ---------- ------------ --------- ----------- --------- ----------- ----------- Balance at March 31, 1997 (restated) 7,313,841 27,320,449 1,257,178 4,769,878 1,257,178 4,769,878 2,295,328 Common stock and options issued in connection with business acquisitions 1,065,266 11,757,426 - - - - - Exercise of stock options and warrants 6,270,314 43,989,418 283 - 283 - (2,295,328) Stock options issued to Advisory Board members, clinical evaluators, medical directors, and other consultants - 479,620 - - - - - Net loss for the year - - - - - - - ---------- ------------ --------- ----------- --------- ----------- ----------- Balance at March 31, 1998 14,649,421 83,546,913 1,257,461 4,769,878 1,257,461 4,769,878 - Common stock reserved for issuance in connection with litigation settlement 2,250,000 7,447,500 - - - - - Exercise of stock options and warrants 62,857 202,619 - - - - - Stock options issued to Advisory Board members, clinical evaluators, medical directors, and other consultants - (842,692) - - - - - Net loss for the year - - - - - - - ---------- ------------ --------- ----------- --------- ----------- ----------- Balance at March 31, 1999 16,962,278 $ 90,354,340 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ - ========== ============ ========= =========== ========= =========== ===========
See accompanying notes. F-5 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Common Unrealized Class B Stock Holdings Accumulated Warrants Warrants Gains Deficit Total ------------ ------------ -------------- -------------- -------------- Balance at March 31, 1996 $ 376,774 $ 192,130 $ 3,666,367 $ (18,616,414) $ 13,797,046 Common stock and B warrants issued in connection with secondary public offering 1,037,514 - - - 10,400,812 Common stock issued in connection with the formation of the Data.Site joint venture - - - - 1,200,000 Exercise of stock options and warrants 76,530 - - - 300,575 Stock options issued to Advisory Board members, clinical evaluators, medical directors, and other consultants - - - - 190,001 Decrease in unrealized holding gain on short-term investments - - (3,666,367) - (3,666,367) Net loss for the year (restated) - - - (5,973,357) (5,973,357) ------------ ------------ -------------- -------------- -------------- Balance at March 31, 1997 (restated) 1,490,818 192,130 - (24,589,771) 16,248,710 Common stock and options issued in connection with business acquisitions - - - - 11,757,426 Exercise of stock options and warrants 40,894 - - - 41,734,984 Stock options issued to Advisory Board members, clinical evaluators, medical directors, and other consultants - - - - 479,620 Net loss for the year - - - (38,764,287) (38,764,287) ------------ ------------ -------------- -------------- -------------- Balance at March 31, 1998 1,531,712 192,130 - (63,354,058) 31,456,453 Common stock reserved for issuance in connection with litigation settlement - - - - 7,447,500 Exercise of stock options and warrants - - - - 202,619 Stock options issued to Advisory Board members, clinical evaluators, medical directors and other consultants - - - - (842,692) Net loss for the year - - - (28,960,946) (28,960,946) ------------ ------------ -------------- -------------- -------------- Balance at March 31, 1999 $ 1,531,712 $ 192,130 $ - $ (92,315,004) $ 9,302,934 =========== ============ ============== ============== ==============
See accompanying notes. F-6 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ------------------------------------------------------------------- 1999 1998 1997 (Restated) Operating Activities: Net loss $ (28,960,946) $ (38,764,287) $ (5,973,357) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,647,794 1,612,691 841,467 Stock issued in connection with shareholder litigation settlement 7,447,500 - - Loss on disposal of discontinued operations 3,511,460 - - Write off of investment in Mattan Corporation - - 881,010 Acquired in-process research and development - 12,800,000 250,000 Minority interest in loss of consolidated subsidiaries (1,764,736) (273,811) (60,000) Non-cash component of merger related and integration costs - 2,332,238 - Stock options issued to advisors and consultants (842,692) 479,620 190,001 Termination of strategic alliance with IBC - - 125,000 Changes in operating assets and liabilities: Accounts receivable 3,386,037 (1,977,906) (539,045) Inventories (1,316,339) 394,975 (1,099,277) Prepaid expenses and other current assets 1,947,384 (1,505,104) (342,438) Accounts payable (1,736,100) 2,190,093 (361,678) Accrued liabilities (1,353,466) 4,843,974 319,936 Change in operating assets and liabilities of discontinued operations (276,926) (264,314) 176,909 ------------------ ----------------- ------------------- Net cash used in operating activities (18,311,030) (18,131,831) (5,591,472) ------------------ ----------------- ------------------- Investing Activities: Sale (purchase) of short-term investments 9,666,918 (5,698,630) (3,968,288) Patent and intangible expenditures (110,151) (87,989) (178,139) Business acquisitions - (5,002,172) (96,028) Purchase of property and equipment (360,916) (514,827) (24,477) Purchase of property, equipment, and intangible assets of discontinued operations (23,494) (373,467) - Other - (410,179) - ------------------ ----------------- ------------------- Net cash provided by (used in) investing activities 9,172,357 (12,087,264) (4,266,932) ------------------ ----------------- -------------------
See accompanying notes. F-7 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31, ------------------------------------------------------------------ 1999 1998 1997 ----------------- ----------------- ------------------ Financing Activities: Proceeds from equity offerings - - 10,400,812 Net borrowings (repayments) under line of credit (1,997,693) (695,340) 800,000 Proceeds from exercise of stock options warrants 202,619 41,734,984 300,575 Decrease (increase) in restricted cash 2,100,000 (1,100,000) (1,050,000) Other - (171,645) (454,836) ----------------- ----------------- ------------------ Net cash provided by financing activities 304,926 39,767,999 9,996,551 ----------------- ----------------- ------------------ Net (decrease) increase in cash and cash equivalents (8,833,747) 9,548,904 138,147 Cash and cash equivalents at beginning of period 9,722,514 173,610 35,463 ----------------- ----------------- ------------------ Cash and cash equivalents at end of period $ 888,767 $ 9,722,514 $ 173,610 ================= ================= ================== Supplemental disclosures of cash flow information Cash paid for interest $ 124,011 $ 120,000 $ 115,283 ================= ================ ==================
Significant noncash investing and financing activities excluded from the accompanying consolidated statements of cash flows are as follows: In fiscal 1998 and 1997, the Company issued Class A common stock valued at $11,757,426 and $1,200,000, respectively, in connection with business acquisitions. In fiscal 1999, the Company reserved for issuance 2,250,000 shares of Class A common stock valued at $7,447,500 in connection with an agreement in principle to settle a lawsuit (Note 6). In addition, the Company wrote-off $3,511,460 of assets related to discontinued operations (Note 3). See accompanying notes. F-8 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 1. ORGANIZATION AND NATURE OF OPERATIONS Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and commenced operations in August 1991 after acquiring substantially all of the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures and markets several lines of lasers for surgical and other medical purposes, disposables and associated accessory products for the medical and dental market. The Company also designs, develops, manufactures and markets digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company has suffered recurring losses from operations and may continue to incur losses for the foreseeable future due to the significant costs anticipated to be incurred in connection with manufacturing, marketing and distributing its laser and imaging products. In addition, the Company intends to conduct continuing research and development activities, including regulatory submittals and clinical trials to develop additional applications for its technology. The Company operates in a highly competitive environment and is subject to all of the risks inherent in a new business enterprise. Further, as discussed in Note 6, the Company has been named in class action lawsuits alleging violations of federal and state securities laws. In November 1998, the Company reached an agreement in principle with lead plaintiffs and their counsel to settle related matters. Any significant uninsured judgment or settlement amount ultimately associated with the class action litigation would significantly impact the Company's ability to satisfy its working capital requirements. Management believes that the Company's present liquid assets will be sufficient to meet its working capital requirements through at least fiscal 2000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED The Company's independent auditors unexpectedly resigned during May 1998 and withdrew their opinion on the Company's fiscal year 1997 financial statements. Accordingly, the Company retained new auditors to re-examine the 1997 financial statements. Because of the extended period of time that had passed since the initial report was issued, a number of matters were identified of which the Company was not aware when it initially issued the 1997 financial statements. Although the Company believes that the initially issued 1997 financial statements were not materially misstated in terms of net loss, total assets and shareholders' equity, the statements have nonetheless been restated in the interest of full disclosure. F-9 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED) The following is a summary of the impact of the restatement on the 1997 consolidated statement of operations.
1. Reduction of previously reported sales, net of related cost of sales $ (280,000) 2. Revision to inventory valuation allowances 160,000 3. Additional bad debts expense (313,000) 4. Minority interest in loss of consolidated subsidiary 60,000 5. Other, net (10,000) ----------- Net increase in 1997 loss $ (383,000) ===========
The effects on the Company's previously issued 1997 financial statements are summarized as follows:
Previously Increase Reported (Decrease) Restated ---------------- ----------------- ------------------ Consolidated balance sheet: Current assets $ 10,658,161 $ (355,000) $ 10,303,161 Other assets 8,662,450 2,113,725 10,776,175 ---------------- ----------------- ------------------ Total assets $ 19,320,611 $ 1,758,725 $ 21,079,336 ================ ================= ================== Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901 Minority interest - 2,053,725 2,053,725 Net shareholders' equity 16,631,710 (383,000) 16,248,710 ---------------- ----------------- ------------------ Total liabilities and shareholders' equity $ 19,320,611 $ 1,758,725 $ 21,079,336 ================ ================= ================== Consolidated statement of operations and comprehensive loss: Net sales $ 5,530,861 $ (440,000) $ 5,090,861 Cost of sales 3,968,539 (320,000) 3,648,539 ---------------- ----------------- ------------------ Gross profit 1,562,322 (120,000) 1,442,322 Selling and marketing expenses 2,406,010 9,000 2,415,010 General and administrative expenses 1,538,948 314,000 1,852,948 All other expenses 3,025,978 - 3,025,978 ---------------- ----------------- ------------------ Loss from continuing operations (5,408,614) (443,000) (5,851,614) Interest income, net 15,493 - 15,493 Minority interest in loss of consolidated subsidiary - 60,000 60,000 ---------------- ----------------- ------------------ Loss from continuing operations $ (5,393,121) $ (383,000) $ (5,776,121) Loss from discontinued operations (197,236) - (197,236) ---------------- ----------------- ------------------
F-10 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED)
Previously Increase Reported (Decrease) Restated ---------------- ----------------- ------------------ Net loss $ (5,590,357) $ (383,000) $ (5,973,357) ================ ================= ================== Items of other comprehensive income (loss) - - - ---------------- ----------------- ------------------ Comprehensive loss $ (5,590,357) $ (383,000) $ (5,973,357) ================ ================= ================== Basic and diluted net loss per share: Loss from continuing operations (.93) (.07) (.99) Loss from discontinued operations (.03) - (.03) ---------------- ----------------- ----------------- Net loss per share $ (.96) $ (.07) $ (1.02) ================ ================= =================
REVENUE RECOGNITION Revenues are generally recognized when products are shipped to customers. Allowances for returns are provided for based upon actual experience and identified risks. SHORT-TERM INVESTMENTS AND RESTRICTED CASH The Company invests excess cash in United States Treasury securities and commercial paper, generally with maturities of less than one year. Short-term investments with a maturity of less than three months when purchased are classified as cash equivalents. Investments with maturities in excess of three months are presented as short-term investments in the accompanying financial statements. Pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company's short-term investments are classified as available-for-sale and are reported at fair market value with unrealized gains and losses reflected as an adjustment to shareholders' equity. There were no material unrealized gains or losses at March 31, 1999 or 1998. Restricted cash consists of certificates of deposits held to secure borrowings under the Company's line of credit, and is classified as a current asset since it is collateral for a current liability. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES The Company generates revenues principally from sales in the medical field. As a result, the Company's accounts receivable are concentrated primarily in this industry. Sales in foreign countries accounted for approximately 11%, 13%, and 25% of the Company's total sales in fiscal 1999, 1998, and 1997, respectively. These foreign sales related almost entirely to sales in Asia and Europe. F-11 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK AND FOREIGN SALES (CONTINUED) The Company performs ongoing credit evaluations of its customers and generally does not require collateral on its accounts receivable, other than the products being sold. Frequently, letters of credit are obtained for international sales. The Company maintains allowances for estimated potential credit losses. LONG LIVED ASSETS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121). No events occurred during the years ended March 31, 1999 or 1998 which resulted in an impairment of assets, except for the discontinuance of operations of Data.Site, LLC which resulted in the write-off of various long-lived assets (Note 3). INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and are comprised of the following:
March 31, March 31, 1999 1998 ---------------- ---------------- Raw materials $ 8,980,306 $ 5,980,793 Work-in-process 756,122 1,313,974 Finished goods 7,048,239 5,876,710 ---------------- ---------------- 16,784,667 13,171,477 Less reserve for slow moving inventories and excess purchase commitments (10,987,613) (8,688,779) ---------------- ---------------- $ 5,797,054 $ 4,482,698 ================ ================
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for replacements and improvements are capitalized while expenditures for repairs and maintenance are charged to operating expense as incurred. F-12 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT (CONTINUED) Property and equipment are comprised of the following:
March 31, March 31, 1999 1998 --------------- --------------- Machinery, equipment, molds and tooling $ 2,826,774 $ 1,948,560 Furniture, fixtures, and office equipment 2,277,443 3,004,906 Software 114,345 375,000 --------------- --------------- 5,218,562 5,328,466 Less accumulated depreciation (3,745,142) (3,550,043) --------------- --------------- $ 1,473,420 $ 1,778,423 =============== ===============
Depreciation of property and equipment is calculated on a straight-line basis over the following estimated useful lives: Machinery, equipment, molds and tooling 5-10 years Furniture, fixtures, and office equipment 10 years Software 3 years Leasehold improvements Shorter of estimated useful life or term of lease INTANGIBLE ASSETS Intangible assets consist primarily of patents and technology rights, goodwill and license agreements. The costs assigned to acquired intangible assets, partially based upon independent appraisals, are being amortized on a straight-line basis over the estimated useful lives of the assets ranging from 2 to 15 years. Intangibles are comprised of the following:
March 31, March 31, 1999 1998 --------------- ---------------- Patents and technology rights $ 13,963,247 $ 13,062,710 Goodwill 249,172 2,839,570 License agreements 110,000 110,000 --------------- ---------------- 14,322,419 16,012,280 Less accumulated amortization (5,152,059) (4,020,601) --------------- ---------------- $ 9,170,360 $ 11,991,679 =============== ================
F-13 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS (CONTINUED) During the year ended March 31, 1999, the Company discontinued the operations of its 51%-owned subsidiary Data.Site, LLC (Note 3). Accordingly, the Company wrote-off all remaining unamortized goodwill amounting to $2,604,251. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. A substantial portion of the Company's research and development expense is related to developing new products, improving existing products or processes, and clinical research programs. From time to time, the Company enters into agreements with certain doctors to exchange a portion of a product's sales price for services related to the completion of certain portions of clinical studies necessary for obtaining product approval from the U.S. Food and Drug Administration. Typically, the amounts consist of a portion of the product sales price which is equal to the cost of the services to be rendered by the doctor. Pursuant to the agreements, in the event the doctor is unable to complete the agreed upon clinical study, the doctor is required to remit a cash payment for the entire amount. ADVERTISING EXPENSES The Company expenses advertising costs as they are incurred. Advertising expenses aggregated $758,301, $628,410, and $143,608 in 1999, 1998, and 1997, respectively. INCOME TAXES The Company accounts for income taxes in accordance with statement of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes. SFAS 109 requires the liability method of accounting for income taxes. No credits for tax benefits have been recognized, since their realization is not reasonably assured (see Note 7). STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments, including money market accounts and mutual funds, with a maturity of three months or less when acquired to be cash equivalents. F-14 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER SHARE Net loss per share has been computed based on the weighted average number of the Company's common shares outstanding during each presented period and excludes all shares of Class E-1 and Class E-2 common stock, outstanding or subject to option, because all such shares of stock are subject to escrow and the conditions for the release of those shares from escrow have not been satisfied. Furthermore, common stock equivalents, such as stock options and warrants, were not considered in the net loss per share calculation because the effect would be antidilutive. As discussed in Note 10, the Company issued convertible debentures in a private placement subsequent to year-end. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations, in accounting for its employee stock option grants. Options granted to consultants and other non-employees are accounted for under the fair value method in accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates and assumptions include inventory valuation and the realizability of certain intangible assets. The Company's inventories and intangible assets largely relate to technologies which have yet to gain widespread market acceptance. Inventory reserves have been established based upon sales forecasts. The Company believes that no further losses will be incurred on the disposition of its inventories and that the remaining economic life of the Company's intangible assets is reasonable. If widespread market acceptance of the Company's products is not achieved, the carrying amount of inventories and intangible assets could be materially affected. Conversely, better than expected sales could yield improved margins. F-15 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130 (SFAS No. 130), Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in an entity's financial statements. This statement requires an entity to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of a statement of financial position. The Company had no items of other comprehensive income during fiscal years 1999, 1998 and 1997. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of and Enterprise and Related Information. This statement requires public enterprises to report financial and descriptive information about its reportable operating segments and establishes standards for related disclosures about product and services, geographic areas, and major customers. The Company has not adopted the disclosure requirements of SFAS No. 131 as management believes that the Company currently has only one reportable operating segment. 3. BUSINESS ACQUISITIONS AND DISPOSITIONS DATA.SITE, LLC Effective January 31, 1997, the Company entered into a joint venture with Refractive Surgical Services, LLC (RSS), a Kansas City based company engaged in the development of certain medical outcomes software. Under this joint venture, the Company and RSS formed Data.Site, LLC (Data.Site). Data.Site acquired and assumed substantially all of the assets and liabilities of RSS. The Company acquired a 51 percent interest in Data.Site, which was accounted for under the purchase method of accounting, and issued 159,787 shares of its Class A common stock to RSS. In connection with the acquisition, the Company recorded goodwill in the amount of $2,893,179 and a minority interest of $2,113,725. The Company has funded Data.Site's operations with advances of cash or equivalent services in the aggregate amount of $2,036,452 through March 31, 1999. As of March 31, 1999 and 1998, RSS owed the Company $599,194 and $266,000, respectively, and such amounts have been fully reserved. In March 1999, Data.Site's Board of Directors adopted a plan to discontinue its operations. Accordingly, the operating results of Data.Site's operations, including the write-off of unamortized goodwill of $2,604,251, capitalized software of $666,304 and property and equipment of $240,905, have been segregated from continuing operations and reported on a separate line item on the statement of operations and comprehensive loss for the year ended March 31, 1999. The consolidated statements of operations and comprehensive loss and cash flows for the years ended March 31, 1998 and 1997, have been reclassified to present Data.Site's operating results as discontinued operations. F-16 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED) DATA.SITE, LLC (CONTINUED) Operating results from discontinued operations are as follows for the years ended March 31:
1999 1998 1997 ---------------- ---------------- ---------------- Net sales $ 65,866 $ 532,272 $ - Cost of sales 256,344 160,002 - ---------------- ---------------- ---------------- (190,478) 372,270 - Operating expenses 990,144 818,237 (197,236) ---------------- ---------------- ---------------- $ (1,180,622) $ (445,967) $ (197,236) ================ ================ ================
EYESYS TECHNOLOGIES, INC. On September 30, 1997, the Company acquired all of the equity interests of EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a specialized line of diagnostic ophthalmic equipment, for approximately $12.5 million, in the form of 1,236,668 shares of the Company's common stock (including 319,684 shares held in an escrow account pending the outcome of certain warranties to be determined at the end of 12 and 18 months), and $470,000 in cash. 216,761 of the escrowed shares have been excluded from the determination of the purchase price. If and when they are released, the allocation of the adjusted purchase price will be re-assessed. Options to purchase 210,000 shares of the Company's common stock were also issued in connection with the acquisition. These options were valued in accordance with SFAS 123 and included in the acquisition cost. The acquisition was accounted for as a purchase and the total acquisition cost was allocated among net liabilities assumed ($2,183,429), intangibles ($2,600,000), and in process research and development ($10,200,000). Merger related and integration expenses of $2,147,224 were also recorded as of the acquisition date. EyeSys has been consolidated commencing with the acquisition date. Goodwill arising from the acquisition ($2,298,784) was written-off as of the acquisition date due to uncertainty as to its recoverability. F-17 3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED) OPHTHALMIC IMAGING SYSTEMS During the final four months of fiscal 1998, the Company acquired a controlling interest in Ophthalmic Imaging Systems ("OIS") for $3.3 million in cash. OIS is engaged in the business of designing, developing, manufacturing and marketing digital imaging systems and image enhancement and analysis software for use by practitioners in the ocular health field. Equity accounting was used during the period in which the Company owned at least 20% but less than 50% of the OIS stock (December 1997 through February 1998). Commencing with the date at which the controlling interest was acquired (late February 1998), OIS has been consolidated with the Company in the accompanying financial statements. The OIS acquisition has been accounted for as a purchase and the total acquisition cost was allocated among net liabilities of OIS ($996,835), intangibles ($1,687,407) and in process research and development ($2,600,000). Merger related and integration expenses of $1,687,407 were also recorded as of the date at which the controlling interest was acquired. The Company is in the process of negotiating an agreement for the purchase of the minority interests of OIS. The following unaudited pro forma consolidated results of operations for the year ended March 31, 1998 give effect to the EyeSys and OIS acquisitions as if they had occurred at the beginning of fiscal 1998: Net sales $ 17,975,000 Net loss (42,885,000) Net loss per share (3.58) The unaudited pro forma information is not necessarily indicative of the combined results of operations that would have occurred during the periods presented nor for future results of operations. The Company entered into a Stock Purchase Agreement, dated February 25, 1998, pursuant to which it agreed, subject to certain conditions, to commence an exchange offer to acquire all of the outstanding common stock of OIS not owned by the Company. This Stock Purchase Agreement was terminated as of August 21, 1998. In connection with this termination, the Company may be liable to pay OIS a $500,000 break-up fee, which could be satisfied by the reduction of indebtedness of OIS to the Company which arose after March 31, 1998. The parties are currently negotiating various issues relating to the termination of the Purchase Agreement and their future business relationship. OTHER During fiscal 1998, three other business acquisitions occurred, which were not individually or collectively significant to the financial condition or operating results of the Company. F-18 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 4. RESEARCH GRANT In September 1995, the Company obtained a Small Business Innovative Research Grant totaling approximately $750,000 for the study of laser emulsification. Pursuant to the terms of the grant, the Company is eligible to receive reimbursement for research and development costs incurred in connection with the laser emulsification study up to $750,000 upon the achievement of certain milestones, as defined. During fiscal 1997, the Company received the final grant payment of approximately $450,000. Amounts received under the grant were offset against research and development costs incurred in the study. 5. LINES OF CREDIT The Company had a credit facility with a bank which provided for borrowings of up to $2,100,000. As of March 31, 1998, total borrowings under this agreement were $1,936,000, bearing interest at the bank's prime rate (8.50% at March 31, 1998). Borrowings under the agreement were secured by a certificate of deposit and were repaid in September 1998. The agreement expired in September 1998. The Company's OIS subsidiary has an account's receivable financing agreement, which allows for advances of up to 80% of eligible receivables up to $960,000. The financing agreement is subject to annual renewal in November of each year, unless terminated by either party. As of March 31, 1999 and 1998, $70,470 and $132,634 were outstanding under OIS's line of credit, respectively. 6. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases its office and production facilities under a noncancellable operating lease that expires in December 2000. Total rental expense under operating leases was $331,247, $251,000, and $296,000 for the fiscal years ended March 31, 1999, 1998, and 1997, respectively. At March 31, 1999, future minimum lease payments under noncancellable operating leases are as follows: 2000 $ 245,412 2001 187,866 ----------- $ 433,278 =========== OIS has a month to month operating lease which requires minimum monthly payments of $7,000. F-19 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) IFS LITIGATION The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), a supplier of certain fiber optics, that expires in the fiscal year ending March 31, 2002. The agreement requires the supplier to sell exclusively to the Company fiber optics for medical and dental applications as long as the Company purchases defined minimum amounts. In March 1994, the Company initiated litigation against IFS. The Company's complaint alleges that IFS and two of its officers misrepresented IFS' ability to supply optical fibers, and that IFS breached its supply agreement and certain warranties. In April 1994, IFS filed a cross-complaint alleging breach of contract and intentional interference with prospective economic advantage, seeking declaratory relief that the contract has been terminated and that IFS is free to market its fiber optics to others. In July 1994, Coherent, Inc., a major shareholder of IFS and a manufacturer of medical lasers which employ IFS optical fibers, joined the lawsuit for the express purpose of defending their rights to the IFS optical fibers. In May 1995, the Company instituted litigation concerning this dispute in Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation (Westinghouse) and an individual employee of Westinghouse, who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995, the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. In July 1996, the court in the California state court action granted demurrers by Westinghouse and the employee of Westinghouse to all causes of action against them, as well as all but one of the Company's claims against Coherent. As a result, the claims that were the subject of the granted demurrers have been dismissed, subject to the Company's right to appeal. The Company has filed an appeal of these decisions as they relate to Westinghouse and the Westinghouse employee, and briefs have been submitted. No date has been set for a hearing of this appeal. No trial date has been set as to the remaining outstanding causes of action. F-20 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) SHAREHOLDERS LITIGATION The Company and certain of the officers and directors have been named in a number of securities class action lawsuits which allege violations of the Securities Exchange Act or the California Corporations Code. The plaintiffs seek damages on behalf of classes of investors who purchased the Company's stock between May 7, 1997 and April 15, 1998. The complaints allege that the Company misled investors by failing to disclose material information and making material misrepresentations regarding the Company's business operations and projections. The Company has also been named in a shareholder derivative action purportedly filed on its behalf against certain officers and directors arising out of the same alleged acts. The Company has reached an agreement in principle with lead plaintiffs and their counsel to settle the class and derivative actions. Under the terms of the agreement in principle, in exchange for a release of all claims, the Company would pay 2,250,000 shares of common stock and $4,600,000 in cash. The cash portion of the settlement would be paid by the Company's insurance carrier. Completion of the settlement is subject to execution of the final settlement agreement, court approval and certain other conditions. If the settlement is not completed, is not approved, or is not consummated for any reason, the parties would continue to litigate the actions. In accordance with the terms of the agreement in principle to settle class and derivative actions, the Company established a reserve during the quarter ended December 31, 1998 for the issuance of 2,250,000 shares of common stock. These shares were valued at a price of $3.31 per share, which was the closing price of the Company's stock on November 18, 1998, the effective date of the proposed settlement agreement. The Company has also included approximately $634,000 of associated legal and professional fees in this reserve, but has not included in the reserve approximately $4,600,000 in cash that would be paid by the Company's insurers. The Company is involved in various other disputes and lawsuits arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of these disputes and other lawsuits may adversely affect the Company. However, it is the opinion of management, that the outcome of such other matters will not have a material adverse impact on the Company's consolidated financial position, results of operations, or cash flows. OTHER The Company has executed royalty agreements with certain parties that require the payment of royalties upon the achievement of defined sales levels. To date, no such royalty payments have been required pursuant to the royalty agreements. 7. INCOME TAXES The Company has incurred operating losses since its inception and, as a result, no provision for or benefit from income tax has been recorded. F-21 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 7. INCOME TAXES (CONTINUED) Deferred tax assets comprised the following at March 31:
1999 1998 ---------------- ---------------- Tax operating loss carryforwards $ 18,659,120 $ 14,502,970 Inventory and receivable reserves and related temporary differences 8,433,262 1,705,050 Depreciation and amortization 1,139,454 890,215 Research and development credit carryforwards 539,630 424,494 Accruals not currently deductible 3,623,530 193,255 ---------------- ---------------- Total deferred tax assets 32,394,996 17,715,984 Valuation allowance for deferred tax assets (32,394,996) (17,715,984) ---------------- ---------------- Net deferred taxes $ - $ - ================ ================
The Company has approximately $55 million of federal net operating loss carryforwards at March 31, 1999 ($36 million for state purposes), which will begin to expire in 2006. A valuation allowance has been established for the entire deferred tax asset. The Tax Reform Act of 1986 contains provisions which could substantially limit the availability of the net operating loss carryforwards if there is a greater than 50% change in ownership during a three year period. As a result of the Company's public offerings, the Company experienced an ownership change of more than 50%, resulting in a limitation on the utilization of their net operating loss carryforwards. Further ownership changes may occur as a result of shares to be issued to settle litigation (Note 6) or may occur as a result of the exercise of stock options or issuance of stock to complete business combinations. The limitation is based on the value of the Company on the date that the change in ownership occurred. The ultimate realization of the loss carryforwards is dependent on the extent of limitations and the future profitability of the Company. 8. SHAREHOLDERS' EQUITY INITIAL AND SECONDARY PUBLIC OFFERINGS On December 7, 1994, the Company completed an initial public offering of 2,760,000 Units of the Company's securities, each unit consisting of one share of Class A common stock, one redeemable Class A warrant and one redeemable Class B warrant (the Units). The Company realized net proceeds of $10,953,000 from this offering and the related exercise of the underwriters over allotment option. Each Class A warrant consisted of the right to purchase one share of Class A common stock and one Class B warrant through November 30, 1999 at an exercise price of $6.50. Each Class B warrant consists of the right to purchase one share of Class A common stock at an exercise price of $8.00. The Company has the right to redeem the Class A and Class B warrants after November 30, 1997 at a price of $.05 per warrant subject to certain conditions regarding the bid price of the Class A common stock. F-22 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 8. SHAREHOLDERS' EQUITY (CONTINUED) On October 18, 1996, the Company completed a public offering of 11,000 Units of the Company's securities, each Unit consisting of 190 shares of Class A common stock and 95 redeemable Class B warrants (the Units). The Company realized net proceeds of $10,401,000 from this offering and the related exercise of the underwriters over allotment option. Each Class B warrant consists of the right to purchase one share of Class A common stock through November 30, 1999 at an exercise price of $8.00. During fiscal 1998, the Company received approximately $41,735,000 from the exercise of options and warrants, and issued an additional 4,176,000 Class B Warrants and 6,270,000 shares of Class A Common Stock. As a result of such exercises, no Class A warrants remain outstanding. STOCK OPTIONS The Company has adopted several stock option plans that authorize the granting of options to employees, officers and/or consultants to purchase shares of the Company's Class A common stock. The stock option plans are administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the terms of the options, including the exercise price, the number of shares subject to option and the exercisability of the options. The options are generally granted at the fair market value of the shares underlying the options at the date of the grant and generally expire within ten years of the grant date. In addition to options granted pursuant to the stock option plans, the Company has issued options to purchase shares of the Company's Class A common stock to certain members of the Board of Directors, consultants and former notes payable holders. The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its employee stock option grants. Accordingly, no compensation expense has been recognized for its employee stock option awards because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. The Company recognizes expense related to grants of options to non-employees in accordance with the fair value provisions of SFAS No. 123. Such expenses (recoveries) aggregated $(842,692) in 1999, $1,590,524 in 1998 (which includes $1,110,904 of merger related and integration costs associated with the EyeSys acquisition) and $190,001 in 1997. F-23 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 8. SHAREHOLDERS' EQUITY (CONTINUED) FASB Statement No. 123, Accounting for Stock-Based Compensation, requires proforma information regarding net income (loss) and net income (loss) per share using compensation that would have been incurred if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of options granted have been estimated at the date of grant using a Black-Scholes option pricing model using the following assumptions:
1999 1998 1997 --------------- --------------- ---------------- Risk free interest rate 5.50% 6.00% 6.00% Stock volatility factor 1.50 0.64 0.58 Weighted average expected option life 4 years 4 years 4 years Expected dividend yield 0% 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's compensation expense used in determining the pro forma information ($2,049,615, $1,947,458, and $974,469 for fiscal years 1999, 1998, and 1997, respectively) may not be indicative of such expense in future periods as the 1997 amounts are based only on option grants after December 15, 1994. Proforma information is as follows:
1999 1998 1997 --------------- --------------- --------------- Pro forma net loss $ (31,853,753) $ (40,711,745) $ (6,947,826) Pro forma net loss per share $ (2.05) $ (3.56) $ (1.19)
A summary of the Company's stock option activity, and related information for the years ended March 31 follows (excluding option grants that are subject to shareholder approval):
1999 1998 1997 ---------------------- ----------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding-beginning of year 3,486,669 $ 6.84 2,308,049 $ 5.51 1,423,949 $ 5.58 Granted 1,729,000 7.40 1,899,500 9.22 1,042,756 6.16 Exercised (57,115) 4.69 (395,271) 6.20 (1,899) 1.00 Forfeited/cancelled (913,953) 8.00 (325,609) 8.40 (156,757) 10.53 ------------ -------- ----------- --------- ------------ ------- Outstanding end of year 4,244,601 $ 6.85 3,486,669 $ 6.84 2,308,049 $ 5.51 ============ ======== =========== ========= ============ =======
F-24 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 8. SHAREHOLDERS' EQUITY (CONTINUED) The weighted average remaining contractual life of options as of March 31, 1999 was as follows:
Weighted Average Weighted Weighted Number of Contractual Average Average Options Life Exercise Options Exercise Range of Exercise Prices Outstanding Years Price Exercisable Price ------------------------ --------------- ----------- ----------- -------------- ----------- $1.00 - $2.81 485,923 5 $ 2.10 122,230 $ 2.32 $4.50 - $8.85 2,792,306 8 6.48 1,765,306 5.98 Greater than $9.00 966,372 9 10.29 486,537 10.46 ----------- ----------- 4,244,601 2,374,073 ========== ==========
CLASS E-1 AND CLASS E-2 COMMON STOCK The Company's Class E-1 and Class E-2 common stock is held in escrow, is not transferable, can be voted and will be converted into Class A common stock only upon the occurrence of specified events. All of the Class E-1 common stock will be automatically converted into Class A common stock in the event that the Company's net income before provision for income taxes, as defined, exceeds certain amounts. Such amount is $26,343,900 for the fiscal year ending March 31, 2000, and such amount will be increased in proportion to increases in the weighted average number of shares of common stock outstanding (as defined) during the relevant year, as compared to the number of shares outstanding immediately after the Company's initial public offering. If the above event does not occur, the Class E-1 common stock will be canceled on June 30, 2000. All of the Class E-2 common stock will be automatically converted into Class A common stock in the event that the Company's net income before provision for income taxes, as defined, amounts to at least $71,181,750 for the year ending March 31, 2000 (which amount shall be adjusted in the same manner as that for the Class E-1 common stock). If the above event does not occur, the Class E-2 common stock will be canceled on June 30, 2000. The Company will, in the event of the release of the Class E-1 and Class E- 2 common stock, recognize during the period in which the earnings thresholds are met, a substantial noncash charge to earnings equal to the fair value of such shares on the date of their release, which would have the effect of significantly increasing the Company's loss or reducing or eliminating earnings, if any, at such time. 9. EMPLOYEE BENEFIT PLAN The Company adopted a Defined Contribution 401(k) Profit Sharing Plan, effective January 1, 1997, covering substantially all of its employees. The Plan permits eligible employees to contribute a portion of their compensation to the Plan, on a tax deferred basis. The Company may make matching contributions, in amounts determined by the Company's Board of Directors. The Company's contributions are in the form of shares of the Company's common stock. During 1997, no amounts were contributed by the Company to the Plan. During 1999 and 1998, 32,397 and 3,752 shares have been approved for contribution by the Company, respectively. 10. SUBSEQUENT EVENTS In May 1999, the Company filed a registration statement to register 4,278,146 shares of its Class A common stock underlying convertible debentures issued in a private placement. Upon filing the registration statement and other certain documents, the Company received $2 million in the private transaction and the Company expects to receive an additional $2 million on the effective date of the registration statement. F-25 PREMIER LASER SYSTEMS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1999, 1998 (RESTATED) AND 1997
Deductions/ Balance at Recoveries Balance Beginning and at end of Description of period Additions Write-off Other * period - --------------------- ---------------- ------------ ------------ -------------- ------------- 1999 Allowance for doubtful accounts receivable $ 1,224,845 $ 1,079,566 $ (307,253) $ - $ 1,997,158 Inventory reserves 8,688,779 2,298,834 - - 10,987,613 1998 Allowance for doubtful accounts receivable $ 613,263 $ 385,407 $ (149,801) $ 375,976 $ 1,224,845 Inventory reserves 1,203,324 5,704,455 - 1,781,000 8,688,779 1997 Allowance for doubtful accounts receivable $ 154,677 $ 403,515 $ (119,054) $ 174,125 $ 613,263 Inventory reserves 950,325 252,999 - - 1,203,324
* Allowance amounts added in connection with business acquisitions. F-26 EX-10.28 2 SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "AGREEMENT"), dated as of May 17, 1999, among Premier Laser Systems Inc., a California corporation (the "COMPANY"), and the investors signatory hereto (each such investor is a "PURCHASER" and all such investors are, collectively, the "PURCHASERS"). WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers and the Purchasers, severally and not jointly, desire to purchase from the Company an aggregate principal amount of $4,000,000 of the Company's 6% Secured Convertible Debentures, due three (3) years from the date of issuance, which shall be in the form of EXHIBIT A (the "DEBENTURES") and which are convertible into shares of the Company's Class A Common Stock, no par value per share (the "COMMON STOCK"). IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy are hereby acknowledged, the Company and the Purchasers agree as follows: ARTICLE I PURCHASE AND SALE 1.1 THE CLOSING. (a) Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchasers and the Purchasers shall, severally and not jointly, purchase from the Company the Debentures for an aggregate purchase price of $4,000,000. The closing of the purchase and sale of the Debentures (the "CLOSING") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Closing is hereinafter referred to as the "CLOSING DATE." (b) Prior to the Closing Date, the parties shall deliver or shall cause to be delivered the following: (A) the Company shall deliver to Robinson Silverman for the benefit of the Purchasers in accordance with the Escrow Agreement, dated as of the date hereof, by and among the Company, the Purchasers and Robinson Silverman in the form of EXHIBIT F (the "ROBINSON SILVERMAN ESCROW AGREEMENT"), (1) the Debentures in the aggregate principal amount indicated below each Purchaser's name on the signature page to this Agreement, registered in the name of each such Purchaser, (2) two Common Stock purchase warrants, each in the form of EXHIBIT D, registered in the name of the appropriate Purchasers, pursuant to which the Purchasers shall have the right at any time and from time to time thereafter through the fifth anniversary of the Closing Date to acquire an aggregate of 60,000 shares of Common Stock, at an exercise price per share (subject to adjustment as provided therein) equal to 120% of the average of the Per Share Market Values for the five (5) days immediately preceding the Closing Date (collectively, the "WARRANTS"), (3) the legal opinion of Rutan & Tucker, LLP, outside counsel to the Company (the "ESCROW AGENT"), in the form of EXHIBIT C, and (4) all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement, including (A) an executed Registration Rights Agreement, dated the date hereof, by and among the Company and the Purchasers, in the form of EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), (B) an executed Security Agreement, dated the date hereof, by and among the Company and the Purchasers, in the form of EXHIBIT -1- F (the "SECURITY AGREEMENT"), (C) an executed Intellectual Property Security Agreement, dated the date hereof, by and among the Company and the Purchasers, in the form of EXHIBIT G (the "IP SECURITY AGREEMENT"), (D) an executed Escrow Agreement, dated the date hereof, by and among the Company, the Purchasers and the Escrow Agent, in form acceptable to the parties hereto (the "ESCROW AGREEMENT"), (E) the Irrevocable Transfer Agent Instructions, in the form of EXHIBIT E, delivered to and acknowledged by the Company's transfer agent (the "TRANSFER AGENT INSTRUCTIONS"), and (F) an executed Robinson Silverman Escrow Agreement; and (B) each Purchaser shall deliver (1) to Robinson Silverman, for delivery in accordance with the Robinson Silverman Escrow Agreement, one half (1/2) of the purchase price for the Debentures indicated below such Purchaser's name on the signature page to this Agreement in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose, (2) to the Escrow Agent, one half (1/2) of the purchase price for the Debentures indicated below such Purchaser's name on the signature page to this Agreement in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Escrow Agent for such purpose, and (3) to Robinson Silverman, for delivery in accordance with the Robinson Silverman Escrow Agreement, all documents, instruments and writings required to have been delivered at or prior to the Closing Date by such Purchaser pursuant to this Agreement, including, without limitation, an executed Registration Rights Agreement, Security Agreement, IP Security Agreement and Escrow Agreement. 1.2 CERTAIN DEFINED TERMS. For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL ISSUE DATE" and "TRADING DAY" shall have the meanings set forth in the Debentures; "BUSINESS DAY" shall mean any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other governmental action to close. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchasers: (a) ORGANIZATION AND QUALIFICATION. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in SCHEDULE 2.1(a) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is an entity, duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the full power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, -2- validity or enforceability of the Debentures or any of this Agreement, the Registration Rights Agreement, the Warrants, the Escrow Agreement, the Robinson Silverman Escrow Agreement, the Security Agreement or the IP Security Agreement (collectively, the "TRANSACTION DOCUMENTS"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (x), (y) or (z), a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. Each of the Transaction Documents and the Debentures has been duly executed by the Company and, when delivered (or filed, as the case may be) in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, by-laws or other charter documents. (c) CAPITALIZATION. The number of authorized, issued and outstanding capital stock of the Company is set forth in SCHEDULE 2.1(c). No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the Common Stock entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as a result of the purchase and sale of the Debentures and the Warrants and except as disclosed in SCHEDULE 2.1(c), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person (as defined below) any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. To the knowledge of the Company, except as specifically disclosed in the SEC Documents (as defined below) or SCHEDULE 2.1(c), no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), or has the right to acquire by agreement with or by obligation binding upon the Company, in excess of 5% of the Common Stock. A "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. -3- (d) ISSUANCE OF THE DEBENTURES AND THE WARRANTS. The Debentures and the Warrants are duly authorized and, when issued and paid for in accordance with the terms hereof, will be duly and validly issued, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of first refusal of any kind (collectively, "LIENS"). The Company has on the date hereof and will, at all times while the Debentures and the Warrants are outstanding, maintain an adequate reserve of duly authorized shares of Common Stock, reserved for issuance to the holders of the Debentures and the Warrants, to enable it to perform its conversion, exercise and other obligations under this Agreement, the Debentures and the Warrants. Such number of reserved and available shares of Common Stock is not less than the sum of (i) 200% of the number of shares of Common Stock which would be issuable upon conversion in full of the Debentures, assuming such conversion occurred on the Original Issue Date for the Debentures, the Filing Date or the Effectiveness Date (each as defined in the Registration Rights Agreement), whichever yields the lowest Conversion Price, (ii) the number of shares of Common Stock issuable upon exercise of the Warrants, and (iii) the number of shares Common Stock which would be issuable upon payment of interest on the Debentures, assuming the Debentures are outstanding for three years and all interest is paid in shares of Common Stock (such number of shares of Common Stock as contemplated in clauses (i)-(iii), the "INITIAL MINIMUM"). All such authorized shares of Common Stock shall be duly reserved for issuance to the holders of the Debentures and the Warrants. The shares of Common Stock issuable upon conversion of the Debentures, as payment of interest thereon and upon exercise of the Warrants are collectively referred to herein as the "UNDERLYING SHARES." The Debentures, the Warrants and the Underlying Shares are collectively referred to herein as, the "SECURITIES." When issued in accordance with the Debentures and the Warrants, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its articles of incorporation, bylaws or other charter documents (each as amended through the date hereof), or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, indenture or instrument (evidencing a Company debt or otherwise) to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could not have or result in a Material Adverse Effect. The sale and issuance of the Securities hereunder shall not cause any Purchaser or Purchasers to be an "Acquiring Person" under the Rights Plan (as defined in Section 3.18). -4- (f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other Federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filings required pursuant to Section 3.11, (ii) the filing with the Securities and Exchange Commission (the "COMMISSION") of a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by the Purchasers (the "UNDERLYING SHARES REGISTRATION STATEMENT"), (iii) the application(s) to the Nasdaq National Market ("NASDAQ") for the listing of the Underlying Shares for trading on the NASDAQ (and with any other national securities exchange or market on which the Common Stock is then listed), (iv) applicable Blue Sky filings and (v) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration could not have or result in, individually or in the aggregate, a Material Adverse Effect (collectively, the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in SCHEDULE 2.1(g), there is no action, suit, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, individually or in the aggregate, have or result in a Material Adverse Effect. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred which has not been waived which, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, except as could not individually or in the aggregate, have or result in a Material Adverse Effect. The security interests granted to the Purchasers pursuant to the Security Agreement and IP Security Agreement will convey and grant to the Purchasers a first priority security interest in all of the Collateral (as such terms is defined in such agreements). (i) PRIVATE OFFERING. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"). Neither the Company nor any Person acting on its behalf has taken any action that could subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act. (j) SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as set forth in SCHEDULE 2.1 (j) attached hereto, the Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS" and, together with the Schedules to this Agreement and the Supplementary Disclosure delivered to the Purchasers prior to the date hereof, the "DISCLOSURE MATERIALS") on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a -5- material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Documents as required. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved ("GAAP"), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. Since March 31, 1998, except as specifically disclosed in the SEC Documents, (a) there has been no event, occurrence or development that has or that could result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. The Company last filed audited financial statements with the Commission on August 21, 1998, and has not received any comments from the Commission in respect thereof. (k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) CERTAIN FEES. Except for certain fees payable by the Company to Wharton Capital Partners, Ltd., and its Affiliates, no fees or commissions will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, or bank with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchasers, their employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred. (m) SOLICITATION MATERIALS. Neither the Company nor any Person acting on the Company's behalf has solicited any offer to buy or sell the Securities by means of any form of general solicitation or advertising. -6- (n) FORM S-3 ELIGIBILITY. Assuming that between the date hereof and August 22, 1999 the Company (i) timely files all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, and (ii) does not default on any of its material debt obligations, the Company will, on August 22, 1999, be eligible to use Form S-3 promulgated under the Securities Act to register its securities for resale with the Commission. (o) EXCLUSIVITY. The Company shall not issue and sell the Debentures to any Person other than the Purchasers other than with the specific prior written consent of the Purchasers. (p) SENIORITY. No indebtedness of the Company is senior to the Debentures in right of payment, whether with respect to interest or upon liquidation, dissolution or otherwise. (q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. Except as specified in SCHEDULE 2.1(q) hereto, the Company has not, in the two years preceding the date hereof, received notice (written or oral) from the NASDAQ or any other stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange or market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such maintenance requirements. (r) PATENTS AND TRADEMARKS. The Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights which are necessary or material for use in connection with its business, and which the failure to so have would have a Material Adverse Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS"). The patents and trademark specified in the IP Security Agreement are the only patent or trademark intellectual property rights (or applications therefor) held by the Company and the Subsidiaries for which applications for patents and trademarks have been made or granted in the United States (excluding, for such purposes, patents and trademarks held by Ophthalmic Imaging Systems, Inc.). To the best knowledge of the Company all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. (s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set forth on SCHEDULE 6(b) to the Registration Rights Agreement, the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority which has not been satisfied. No Person, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. (t) REGULATORY PERMITS. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate Federal, state or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Documents, except where the failure to possess such permits could not, individually or in the aggregate, have or result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. -7- (u) TITLE. The Company and the Subsidiaries have good and marketable title in fee simple to all real property and personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens, except for Liens granted to the Purchasers pursuant to the Security Agreement and IP Security Agreement and for other Liens as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (v) DISCLOSURE. The Company confirms that it has not provided any of the Purchasers or its agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Purchasers shall be relying on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (w) OPHTHALMIC IMAGING SYSTEMS, INC. The Company owns free and clear of all Liens 2,131,758 shares of the common stock, no par value, of Ophthalmic Imaging Systems, Inc., a California corporation, representing 51% of the total issued and outstanding shares of voting stock of such entity (the "OPHTHALMIC SHARES"). 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. Such Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority, to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. The purchase by such Purchaser of the Securities hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Security Agreement and the Intellectual Property Security Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms. (b) INVESTMENT INTENT. Such Purchaser is acquiring the Securities for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof or interest therein, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. Nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold Securities for any amount of time. -8- (c) PURCHASER STATUS. At the time such Purchaser was offered the Debentures and the Warrant, it was, and at the date hereof it is, and at each exercise date under the Warrant, it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) EXPERIENCE OF THE PURCHASER. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. (e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (f) ACCESS TO INFORMATION. Such Purchaser acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. (g) GENERAL SOLICITATION. Such Purchaser is not purchasing the Securities as a result of or subsequent to any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. (h) RELIANCE. Such Purchaser understands and acknowledges that (i) the Securities are being offered and sold to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that each of the Purchasers makes no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2. -9- ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, except as otherwise set forth herein, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. Notwithstanding the foregoing, the Company, without requiring a legal opinion as described in the immediately preceding sentence, hereby consents to and agrees to register on the books of the Company and with any transfer agent for the securities of the Company any transfer of Securities by a Purchaser to an Affiliate of such Purchaser or to one or more funds or managed accounts under common management with such Purchaser, and any transfer among any such Affiliates or one or more funds or managed accounts, provided that the transferee certifies to the Company that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act and that it is acquiring the Securities solely for investment purposes (subject to the qualifications hereof). Any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement. (b) The Purchasers agree to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. Underlying Shares shall not contain the legend set forth above nor any other legend if the conversion of Debentures, the payment of interest thereon, and exercise of the Warrants or other issuances of Underlying Shares as contemplated hereby, by the Debentures or the Warrants occurs at any time while an Underlying Shares Registration Statement is effective under the Securities Act or, in the event there is not an effective Underlying Shares Registration Statement, at such time, in the opinion of counsel to the Company, such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Company's transfer agent on the day that the Underlying Shares Registration Statement is declared effective -10- by the Commission. The Company agrees that, in the event any Underlying Shares are issued with a legend in accordance with this Section 3.1(b), it will, within three (3) Trading Days after request therefor by a Purchaser, provide such Purchaser with a certificate or certificates representing such Underlying Shares, free from such legend at such time as such legend would not have been required under this Section 3.1(b) had such issuance occurred on the date of such request. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. However, the Company may provide appropriate instructions to any transfer agent of the Company to enforce the provisions of this Section 3.1(b) when the Underlying Shares Registration Statement is not effective. 3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the issuance of the Underlying Shares upon (i) conversion of the Debentures and payment of interest thereon in accordance with the terms of the Debentures, and (ii) exercise of the Warrants in accordance with their terms, will result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue Underlying Shares upon (x) conversion of the Debentures and payment of interest thereon in accordance with the terms of the Debentures, and (y) exercise of the Warrants in accordance with their terms, is unconditional and absolute, subject to the limitations set forth herein in the Debentures or pursuant to the Warrants, regardless of the effect of any such dilution. 3.3 FURNISHING OF INFORMATION. As long as the Purchasers own Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act. As long as the Purchasers own Securities, if the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act such information as is required for the Purchasers to sell the Securities under Rule 144 promulgated under the Securities Act. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion referenced above in this Section. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 INTEGRATION. The Company shall not, and shall use its best efforts to ensure that, no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers. -11- 3.5 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be, if a notice of conversion or exercise (as the case may be) were to be delivered on such date, precluded from (a) issuing 200% of the number of Underlying Shares as would then be issuable upon a conversion in full of the Debentures and as payment of any accrued and unpaid interest in respect thereof in shares of Common Stock, or (b) issuing the number of Underlying Shares upon exercise in full of the Warrants (the "CURRENT REQUIRED MINIMUM"), in either case, due to the unavailability of a sufficient number of authorized but unissued or reserved shares of Common Stock, then the Board of Directors of the Company shall promptly (and in any case, within 30 Business Days from such date) prepare and mail to the stockholders of the Company proxy materials requesting authorization to amend the Company's Articles of Incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least such number of shares as reasonably requested by the Purchasers in order to provide for such number of authorized and unissued shares of Common Stock to enable the Company to comply with its issuance, conversion exercise and reservation of shares obligations as set forth in this Agreement, the Debentures and the Warrants (the sum of (x) the number of shares of Common Stock then outstanding plus all shares of Common Stock issuable upon exercise of all outstanding options, warrants and convertible instruments, and (y) the Current Required Minimum, shall be a reasonable number). In connection therewith, the Board of Directors shall (a) adopt proper resolutions authorizing such increase, (b) recommend to and otherwise use its best efforts to promptly and duly obtain stockholder approval to carry out such resolutions (and hold a special meeting of the stockholders no later than the 60th day after delivery of the proxy materials relating to such meeting) and (c) within five (5) Business Days of obtaining such stockholder authorization, file an appropriate amendment to the Company's Articles of Incorporation to evidence such increase. 3.6 RESERVATION AND LISTING OF UNDERLYING SHARES. (a) The Company shall (i) in the time and manner required by NASDAQ and such other exchange, market or quotation system on which the Common Stock is traded, prepare and file with the NASDAQ (and such other national securities exchange or market or trading or quotation facility) an additional shares listing application covering a number of shares of Common Stock which is not less than the Initial Minimum, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing in the NASDAQ (as well as on any such other national securities exchange or market or trading or quotation facility on which the Common Stock is then listed) as soon as possible thereafter, and (iii) provide to the Purchasers evidence of such listing, and the Company shall maintain the listing of its Common Stock thereon. If the number of Underlying Shares issuable upon conversion in full of the then outstanding Debentures, as payment of interest thereon, and upon exercise of the then unexercised portion of the Warrants exceeds 85% of the number of Underlying Shares previously listed on account thereof with NASDAQ (and any such other required exchanges), then the Company shall take the necessary actions to immediately list a number of Underlying Shares as equals no less than the then Current Required Minimum. (b) The Company shall maintain a reserve of shares of Common Stock for issuance upon conversion of the Debentures and for payment of interest thereupon in shares of Common Stock and upon exercise in full of the Warrants in accordance with this Agreement, the Debentures and the Warrants, respectively, in such amount as may be required to fulfill its obligations in full under the Transaction Documents, which reserve shall equal no less than the then Current Required Minimum. -12- 3.7 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent Instructions, Conversion Notice (as defined in EXHIBIT A) and Form of Election to Purchase under the Warrants set forth the totality of the procedures with respect to the conversion of the Debentures and exercise of the Warrants, including the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to convert their Debentures and exercise their Warrants as contemplated in the Debentures and the Warrants (as applicable). 3.8 NOTICE OF BREACHES. Each of the Company and the Purchasers shall give prompt written notice to the other of any breach by it of any representation, warranty or other agreement contained in any Transaction Document, as well as any events or occurrences arising after the date hereof which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained therein to be incorrect or breached as of the Closing Date. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained in any Transaction Document. 3.9 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company shall honor conversions of the Debentures and exercises of the Warrants and shall deliver Underlying Shares in accordance with the respective terms, conditions and time periods set forth in the Debentures and the Warrants. 3.10 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. (a) The Company shall not, directly or indirectly, without the prior written consent of the Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any of its or its Affiliates' equity or equity-equivalent securities (including the issuance of any debt or other instrument is at any time over life thereof convertible into or exchangeable for Common Stock or any other transaction intended to be exempt or not subject to registration under the Securities Act (a "SUBSEQUENT PLACEMENT") for a period of 180 days after the later to occur of the Effectiveness Date (as defined in the Registration Rights Agreement) and the date that the Commission first declares effective an Underlying Shares Registration Statement, except (i) the granting of options or warrants to employees, consultants, officers and directors, and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereinafter duly adopted by the Company, (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants (including the Class B Warrants (as defined herein)) and upon conversion of any currently outstanding convertible securities of the Company, in each case only if such security is disclosed in SCHEDULE 2.1(c), (iii) shares of Common Stock or Common Stock Equivalents (as defined in the Debentures) permitted to be issued without giving rise to an Event of Default under Sections 3(a)(xii) or 3(a)(xiii)(a) of the Debentures, and (iv) shares of Common Stock issuable upon conversion of Debentures, as payment of interest thereon and upon exercise of the Warrants in accordance with the Debentures or the Warrants, respectively, unless (A) the Company delivers to the Purchasers a written notice (the "SUBSEQUENT PLACEMENT NOTICE") of its intention effect such Subsequent Placement, which Subsequent Placement Notice shall describe in reasonable detail the proposed terms of such Subsequent Placement, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Placement shall be effected, and attached to which shall be a term sheet or similar document relating thereto and (B) the Purchasers shall not have notified the Company by 5:00 p.m. (New York City time) on the tenth (10th) Trading Day after their receipt of the Subsequent Placement Notice of their willingness to cause the Purchasers to provide (or to cause its sole designee to provide), subject to completion of mutually acceptable documentation, financing to the Company on the same terms set forth in the Subsequent Placement Notice. If the Purchasers shall fail to notify the Company -13- of their intention to enter into such negotiations within such time period, the Company may effect the Subsequent Placement substantially upon the terms and to the Persons (or Affiliates of such Persons) set forth in the Subsequent Placement Notice; PROVIDED, that the Company shall provide the Purchasers with a second Subsequent Placement Notice, and the Purchasers shall again have the right of first refusal set forth above in this paragraph (a), if the Subsequent Placement subject to the initial Subsequent Placement Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Placement Notice within thirty (30) Trading Days after the date of the initial Subsequent Placement Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Placement Notice. If the Purchasers shall indicate a willingness to provide financing in excess of the amount set forth in the Subsequent Placement Notice, then each Purchaser shall be entitled to provide financing pursuant to such Subsequent Placement Notice up to an amount equal to such Purchaser's pro rata portion of the aggregate principal amount of Debentures purchased by the Purchasers under this Agreement, but the Company shall not be required to accept financing from the Purchasers in an amount in excess of the amount set forth in the Subsequent Placement Notice. (b) Except for (x) Underlying Shares, (y) other "Registrable Securities" (as such term is defined in the Registration Rights Agreement) to be registered, and securities of the Company permitted pursuant to Schedule 6(b) of the Registration's Rights Agreement to be registered, in the Underlying Shares Registration Statement in accordance with the Registration Rights Agreement, and (z) Common Stock permitted to be issued pursuant to paragraph (a)(i), (ii) and (iv) of Section 3.10(a), the Company shall not, for a period of not less than 90 Trading Days after the date that the Underlying Shares Registration Statement is declared effective by the Commission, without the prior written consent of the Purchasers (i) issue or sell any of its or any of its Affiliates' equity or equity-equivalent securities pursuant to Regulation S promulgated under the Securities Act, or (ii) register for resale any securities of the Company. Any days that a Purchaser is not permitted to sell Underlying Shares under the Underlying Shares Registration Statement shall be added to such 90 Trading Day period for the purposes of (i) and (ii) above. 3.11 CERTAIN SECURITIES LAWS DISCLOSURES; PUBLICITY. The Company shall: (i) on the Closing Date issue a press release acceptable to the Purchasers disclosing the transactions contemplated hereby, (ii) file with the Commission a Report on Form 8-K disclosing the transactions contemplated hereby within ten (10) Business Days after the Closing Date, and (iii) timely file with the Commission a Form D promulgated under the Securities Act as required under Regulation D promulgated under the Securities Act and provide a copy thereof to the Purchasers promptly after the filing thereof. The Company shall, no less than two (2) Business Days prior to the filing of any disclosure required by clauses (ii) and (iii) above, provide a copy thereof to the Purchasers. No such filing or disclosure may be made that mentions the Purchasers by name without the prior consent of the Purchasers. Such filings shall be subject to Section 4.11 hereof. 3.12 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. Except in connection with the sale of all or substantially all of the assets of the Company or licensing arrangements in the ordinary course of the Company's business, the Company shall not transfer, sell or otherwise dispose of any Intellectual Property Rights, or allow any of the Intellectual Property Rights to become subject to any Liens, or fail to renew such Intellectual Property Rights (if renewable and it would otherwise lapse if not renewed), without the prior written consent of the Purchasers. -14- 3.13 USE OF PROCEEDS. If delivered to the Company in accordance with the terms of the Robinson Silverman Escrow Agreement, the Company shall use the net proceeds from the funds delivered to it in accordance with the Robinson Silverman Escrow Agreement for working capital purposes only and not for the satisfaction of any Company debt (which, for such purposes, shall include accounts payable) in excess of $750,000 or to redeem any Company equity or equity equivalent securities or to pay in excess of $250,000 to settle any litigation or claim against the Company or any Subsidiary. In accordance with Section 1.1(b), $2,000,000 of proceeds from the sale of the Securities shall be deposited on the Closing Date into a special segregated trust account maintained under the Company's name with the Escrow Agent for such purposes pursuant to the Escrow Agreement, and shall not be released from such account until permitted in accordance with the Escrow Agreement. Upon such release, if any, such remaining net proceeds shall only be used in the manner permitted by the first sentence of this Section and not for the satisfaction of any portion of Company debt, to redeem any Company equity or equity-equivalent securities or to pay or settle any litigation or claim against the Company or any Subsidiary. 3.14 REIMBURSEMENT. If any Purchaser, other than by reason of its gross negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by or against any Person, including stockholders of the Company, in connection with or as a result of the consummation of the transactions contemplated by Transaction Documents, the Company will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which a Purchaser is a named party, the Company will pay such Purchaser the charges, as reasonably determined by such Purchaser, for the time of any officers or employees of such Purchaser devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearings, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of the Transaction Documents except to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company result from the gross negligence or willful misconduct of the applicable Purchaser or entity in connection with the transactions contemplated by this Agreement. 3.15 FORM S-3 ELIGIBILITY. The Company use its best efforts to, become eligible to register for resale its securities pursuant to Form S-3 promulgated under the Securities Act no later than August 22, 1999. -15- 3.16 CERTAIN TRADING RESTRICTIONS. The Purchasers will not enter into any Short Sales (as hereinafter defined) at a price below the Initial Conversion Price (as defined in the Debentures), PROVIDED, that the limitations set forth in this Section shall cease to be in effect on the date that an Underlying Shares Registration Statement is first declared effective by the Commission or if, by the Effectiveness Date, the Underlying Shares Registration Statement has not been declared effective by the Commission and, thereafter, shall resume on the date, if any, the Underlying Shares Registration Statement is declared effective by the Commission. For purposes of this Section, a "Short Sale" by a Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as a short sale and that is made at a time when there is no equivalent offsetting long position in Common Stock held by such Purchaser. For purposes of determining whether there is an equivalent offsetting long position in Common Stock held by a Purchaser, Underlying Shares that have not yet been issued but for which the Company has received a Conversion Notice (with respect to Debentures) or Form of Election to Purchase (with respect to Warrants), as the case may be, shall be deemed held long by a Purchaser. 3.17 CERTAIN FUTURE ACTIONS. Subject to compliance with the Transaction Documents relating thereto, the Company is expressly permitted to (i) lower the exercise price of its Class B Warrants, entitling the holders thereof to purchase an aggregate of 7,592,460 shares of Common Stock (the "CLASS B WARRANTS") and (ii) issue up to 2,250,000 shares of Common Stock in satisfaction of the litigation described in SCHEDULE 2.1(g) hereto. 3.18 RIGHTS PLAN. The Company may not claim or enforce any claims that any Purchaser is (or that the Purchasers taken collectively are) an "Acquiring Person" under the Company's Shareholders Rights Agreement, dated as of March 1998 (or any amendment thereto) (the "RIGHTS PLAN"), by virtue of its purchase or beneficial ownership of Securities. 3.19 CONTINUED OWNERSHIP OF THE OPHTHALMIC SHARES. So long as the security interests granted to the Purchasers under the Security Agreement and the IP Security Agreement shall be in effect the Company shall not without the prior written consent of the Purchasers pledge, sell, transfer, or assign or otherwise dispose of the Ophthalmic Shares. ARTICLE IV MISCELLANEOUS 4.1 FEES AND EXPENSES. At the Closing the Company shall reimburse the Purchasers for their legal fees and expenses incurred in connection with the preparation and negotiation of the Transaction Documents by paying to Robinson Silverman (i) $25,000 for the preparation and negotiation of the Transaction Documents and (ii) $5,000 for due diligence expenses. Such sums shall be deducted from the funds deposited by the Purchasers in accordance with the Robinson Silverman Escrow Agreement and shall be retained by Robinson Silverman and deducted from the amounts, if any, to be delivered to the Company in accordance with the Robinson Silverman Escrow Agreement. Other than the amounts contemplated in the immediately preceding sentence, and except as otherwise set forth in the Registration Rights Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Securities. -16- 4.2 ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents, together with the Exhibits and Schedules thereto, and the Transfer Agent Instructions contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 4.3 NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92618 Facsimile No.: (949) 859-5241 Attn: Chief Financial Officer With copies to: Rutan & Tucker, LLP 611 Anton Boulevard, 14th floor Costa Mesa, CA 92626-1998 Facsimile No.: (714) 546-9035 Attn: Thomas G. Brockington, Esq. If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. or such other address as may be designated in writing hereafter, in the same manner, by such Person. 4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each of the Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or require ment of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 4.5 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. -17- 4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. Except as set forth in Section 3.1(a), the Purchasers may not assign this Agreement or any of the rights or obligations hereunder without the consent of the Company. This provision shall not limit each Purchaser's right to transfer securities or transfer or assign rights under the Registration Rights Agreement. 4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 4.8 GOVERNING LAW. The corporate laws of the State of California shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. 4.9 SURVIVAL. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery and conversion or exercise (as the case may be) of the Debentures and the Warrants. 4.10 EXECUTION. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. -18- 4.11 PUBLICITY. The Company and the Purchasers shall consult with each other in issuing any press releases or otherwise making public statements or filings and other communications with the Commission or any regulatory agency or stock market or trading facility with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement, filings or other communications without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose the names of the Purchasers, or include the names of the Purchasers in any filing with the Commission, or any regulatory agency, trading facility or stock market without the prior written consent of the Purchasers, except to the extent such disclosure (but not any disclosure as to the controlling Persons thereof) is required by law, in which case the Company shall provide the Purchasers with prior notice of such disclosure. 4.12 SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affecting or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 4.13 REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers will be entitled to specific performance of the obligations of the Company under the Transaction Documents. The Company and each of the Purchasers agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. -19- 4.14 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The obligations of each Purchaser hereunder is several and not joint with the obligations of any other Purchaser hereunder, and neither Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] -20- IN WITNESS WHEREOF, the parties hereto have caused this Secured Convertible Debenture Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN -------------------------------- Name: Colette Cozean Title: CEO STRONG RIVER INVESTMENTS, INC. By: /S/ KENNETH L. HENDERSON ------------------------------- Kenneth L. Henderson Attorney-in Address for Notice: Strong River Investments, Inc. c/o Cavallo Capital Corp. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Facsimile No.: (212) 332-3256 Attn: Avi Vigder Debentures Purchase Price: $2,000,000 HERKIMER LLC By: /S/ L. FAMINGON /S/ JUDITH PATRICK ----------------------------------- Name: CTC Corporation Ltd. Title: Director Address for Notice: c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies Facsimile No.: (345) 945-7566 with a copy to: Southridge Capital Management LLC Executive Pavillon 20 Grove Street Ridgefield, CT 06877 Facsimile No.: (203) 431-8301 Debentures Purchase Price: $2,000,000 With copies for communications to any Purchaser to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson, Esq. Eric L. Cohen. Esq. SCHEDULE 2.1(a) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT SUBSIDIARIES - ------------ 1. EyeSys - Premier Inc., a Delaware corporation. 100% owned 2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation (Premier Laser Systems, Inc. is the sole member.) 3. Data.Site, LLC, a California limited liability company (51% owned by Premier Laser Systems, Inc., now in the process of being shut down). 4. Ophthalmic Imaging Systems, a California corporation (51% owned by Premier Laser Systems, Inc.) Schedule 2.1(c) to Secured Convertible Debenture Purchase Agreement
OUTSTANDING OR RESERVED ----------------------- 1. Class A Common Stock Outstanding (35,600,000 14, 961,436 shares authorized) 2. Class A Common Stock Reserved for class action 2,250,000 settlement 3. Class E-1 Common Stock Outstanding (2,200,000 shares 1,257,461 authorized) 4. Class E-2 Common Stock Outstanding (2,200,000 shares 1,257,461 authorized 5. Class B Warrants 7,591,760 6. Other Warrants and Options(1) 4,094,522 7. Rights(2) 1 per share of Common Stock 8. Blank check Preferred Stock (8,850,000 shares 0(3) authorized)
- -------- (1) Outstanding at December 31, 1998. Expire between March 2003 and March 2007, having exercise prices of from $1.00 to $11.06. (2) Issued under Shareholder Rights Plan. (3) Class C Preferred shares authorized under Rights Plan. SCHEDULE 2.1(g) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT LITIGATION - ---------- 1. PREMIER LASER SYSTEMS, INC. SECURITIES LITIGATION (including derivative claims). United States District Court, Central District of California, Master file No. SACV-98-388-AHS (EEx); and ESKELAND V. COZEAN, ET AL., Orange County, California Superior Court Case No. 797326. 2. FRONTENAC VI LIMITED PARTNERSHIP, ET AL. V. PREMIER LASER SYSTEMS, INC. United States District Court Case No. CV 98-7880 CBM (ANx). (Dispute with former shareholders of EyeSys Technologies, Inc., related to securities class action). 3. Litigation against Infrared Fiber Systems, Inc., Coherent, Inc. and Westinghouse (as described in Item 3 to Premier Laser Systems Form 10-K for the year ended March 31, 1998). 4. Premier's majority owned subsidiary, Ophthalmic Imaging Systems, Inc. is engaged in litigation in the Sacramento County, California Superior Court, brought by a former employee who alleges he was wrongfully terminated. 5. TELEPHONE REAL ESTATE EQUITY TRUST INC. V. EYESYS TECHNOLOGIES, INC., District Court of Harris County, Texas. Lessor of property formerly occupied by EyeSys Technologies, Inc. claims that EyeSys owes amounts in excess of $100,000 as a result of abandonment of leasehold premises. 6. STOTHERS V. EYESYS TECHNOLOGIES, INC., Harris County, Texas State Court, Cause No. 96- 15283. Plaintiff claims Defendant EyeSys Technologies, Inc. failed to protect Plaintiff, a business invitee, in that Defendant failed to exercise ordinary care to protect Plaintiff from danger either by adequately warning Plaintiff of the condition or making that condition reasonably safe. 7. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF, V. INTERDENT, INC., A CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC. A CALIFORNIA CORPORATION. This is a patent infringement case filed 09/22/97 regarding a laser method for bleaching teeth. 8. Securities and Exchange Commission investigation into accounting practices, commenced May-June 1998. SCHEDULE 2.1(j) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT DELINQUENT REPORTS - ------------------ 1. Annual report on Form 10-K for the fiscal year ended March 31, 1998, due June 29, 1998, filed August 31, 1998. 2. Quarterly Report for the Quarter ended December 31, 1997, filed (amended) August 31, 1997. SCHEDULE 2.1(q) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT NOTICES RE COMPLIANCE WITH NASDAQ RULES - --------------------------------------- 1. Letter from NASDAQ Stock Market dated June 23, 1998. EX-10.29 3 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of May 17, 1999, among Premier Laser Systems, Inc., a California corporation (the "COMPANY"), and the investors signatory hereto (each such investor is a "PURCHASER" and all such investors are, collectively, the "PURCHASERS "). This Agreement is made pursuant to the Secured Convertible Debenture Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE AGREEMENT"). The Company and the Purchasers hereby agree as follows: 1. DEFINITIONS ----------- Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" shall have meaning set forth in Section 3(r). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. "CLOSING DATE" means May 17, 1999. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's Class A Common Stock, no par value. "DEBENTURES" means the Company's 6% Secured Convertible Debentures due three years from the date of issuance thereof, issued to the Purchasers pursuant to the Purchase Agreement. "EFFECTIVENESS DATE" means the 90th day following the Closing Date. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILING DATE" means the 20th day following the Closing Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). "LOSSES" shall have the meaning set forth in Section 5(a). "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Common Stock issuable (i) upon conversion in full of the Debentures, (ii) as payment of interest in respect of the Debentures, and (iii) upon exercise of the Warrants. "REGISTRATION STATEMENT" means the registration statement and any additional registration statements contemplated by Section 2(a), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. -2- "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SPECIAL COUNSEL" means one special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section 4. "UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. "WARRANTS" means (i) the Common Stock purchase warrants issued to the Purchasers pursuant to the Purchase Agreement, and (ii) the Common Stock purchase warrants to purchase an aggregate of 40,000 shares of Common Stock issued to Wharton Capital Partners, Ltd., The Olmstead Group, LLC and I.F. Bodkin in connection with the transactions contemplated by the Purchase Agreement. 2. SHELF REGISTRATION ------------------ (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering the number of Registrable Securities contemplated by Section 2(b) for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-1 or Form SB-2 (or on another appropriate form as mutually agreed to by the Company and the Holders). The Company shall, within ten (10) days of the date on which the Company becomes eligible to register the resale by selling security holders of its securities under Form S-3 promulgated by the Commission, convert the Registration Statement from the originally filed form to Form S-3. The Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is three years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent (the "EFFECTIVENESS PERIOD"), PROVIDED, HOWEVER, -3- that the Company shall not be deemed to have used its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective. (b) In order to account for the fact that the number of shares of Common Stock issuable upon conversion of the Debentures (and as payment of interest thereon) is determined in part upon the market price of the Common Stock prior to the time of conversion, the initial Registration Statement required to be filed hereunder shall include (but not be limited to) a number of shares of Common Stock equal to no less than the sum of (i) 200% of the number of shares of Common Stock into which the Debentures, together with the payment of interest thereon (assuming all interest is paid in shares of Common Stock and that the Debentures remain outstanding for three years), are convertible, assuming such conversion occurred on the Closing Date, the Filing Date or the date the Company files an acceleration request with the Commission relating to the Registration Statement, whichever yields the lowest Conversion Price (as defined in the Debentures) and (ii) the number of shares of Common Stock issuable upon exercise in full of the Warrants. When initially filed, such initial Registration Statement shall cause 4,238,146 shares of Common Stock for the Holders plus 40,000 shares of Common Stock for Wharton Capital Partners, Ltd., The Olmstead Group, LLC and I.F. Bodkin. (c) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected in the form of an Underwritten Offering. In such event, and, if the managing underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such amount shall be allocated pro-rata among the Holders proposing to sell Registrable Securities in such Underwritten Offering. (d) If any of the Registrable Securities are to be sold in an Underwritten Offering, the investment banker in interest that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering upon consultation with the Company. No Holder may participate in any Underwritten Offering hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. -4- 3. REGISTRATION PROCEDURES ----------------------- In connection with the Company's registration obligations hereunder, the Company shall: (a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on the form contemplated by Section 2(a) which Registration Statement shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as ANNEX A, and cause the Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that not less than three (3) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to the Holders, their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall, within ten (10) days of the date on which the Company becomes eligible to register the resale by selling security holders of its securities under Form S-3 promulgated by the Commission, convert the Registration Statement from the originally filed form to Form S-3. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters, shall reasonably object on a timely basis. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. -5- (c) File additional Registration Statements if the number of Registrable Securities at any time exceeds the number of shares of Common Stock then registered in a Registration Statement. The Company shall have 30 days to file such additional Registration Statements after its receipt of notice of the requirement thereof which the Holders may give at any time when the Registrable Securities exceeds 85% of the number of shares of Common Stock then registered in a Registration Statement hereunder. In such event, the Registration Statement required to be filed by the Company shall include a number of shares of Common Stock equal to no less than 200% of the number of shares of Common Stock into which all then outstanding principal amount of Debentures are convertible (assuming such conversion occurred on the Filing Date for such Registration Statement or the date of the filing of the final acceleration request therefor, whichever date yields a lower Conversion Price) less the shares covered by the prior Registration Statement and any other Registrable Securities not then registered in a Registration Statement. (d) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders, which the Holders shall keep confidential); and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. -6- (f) If requested by any managing underwriter or the Holders of a majority in interest of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such managing underwriters and such Holders reasonably agree should be included therein, and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that the Company shall not be required to take any action pursuant to this Section 3(f) that would, in the opinion of counsel for the Company, violate applicable law or be materially detrimental to the business prospects of the Company. (g) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including, if requested, financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (h) Promptly deliver to each Holder, their Special Counsel, and any underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (i) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (j) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by applicable law, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request. -7- (k) Upon the occurrence of any event contemplated by Section 3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (l) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq National Market ("NASDAQ") or on any other stock market or trading facility on which the shares of Common Stock are traded, listed or quoted (each a "SUBSEQUENT MARKET") as and when required pursuant to the Purchase Agreement. (m) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings (subject to the scheduling of appropriate exceptions to insure such representations and warranties are accurate), and confirm the same if and when requested; (ii) in the case of an Underwritten Offering obtain and deliver copies thereof to each Holder and the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each Holder and each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such Special Counsel and underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an Underwritten Offering, at the time of delivery of any Registrable Securities sold pursuant thereto, use its best reasonable efforts to obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to the Company in form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in Section 5 (or such other provisions and procedures acceptable to the managing underwriters, if any, and holders of a majority of Registrable Securities participating in such Under written Offering); and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to Section 3(m)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. -8- (n) Make available for inspection by the selling Holders, any representative of such Holders, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case reasonably requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; PROVIDED, HOWEVER, that any information that is determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known by such Person to be bound by a confidentiality agreement with the Company. (o) Comply with all applicable rules and regulations of the Commission. (p) The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities and the beneficial ownership of Common Stock held by such Holder as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. (q) If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. (r) Each Holder covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(h) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(d) and (ii) it and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. -9- Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Sections 3(d)(ii), 3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(k), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. 4. REGISTRATION EXPENSES --------------------- (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company, except as and to the extent specified in Section 4(b), shall be borne by the Company whether or not pursuant to an Underwritten Offering and whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the NASDAQ and any Subsequent Market on which the Common Stock is then listed for trading, and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. (b) If the Holders require an Underwritten Offering pursuant to the terms hereof, the Company shall be responsible for all costs, fees and expenses in connection therewith, except for the fees and disbursements of the Underwriters (including any underwriting commissions and discounts) and their legal counsel and accountants. By way of illustration which is not intended to diminish from the provisions of Section 4(a), the Holders shall not be responsible for, and the Company shall be required to pay the fees or disbursements incurred by the Company (including by its legal counsel and accountants) in connection with, the preparation and filing of a Registration Statement and related Prospectus for such offering, the maintenance of such Registration Statement in accordance with the terms hereof, the listing of the Registrable Securities in accordance with the requirements hereof, and printing expenses incurred to comply with the requirements hereof. -10- 5. INDEMNIFICATION --------------- (a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents (including any underwriters retained by such Holder in connection with the offer and sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 3(r). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus or to the extent that such information relates to -11- such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus, or in any amendment or supplement thereto. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; PROVIDED, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). -12- (d) CONTRIBUTION. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. MISCELLANEOUS ------------- (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. -13- (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as and to the extent specified in SCHEDULE 6(b) hereto, neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. (c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent specified in SCHEDULE 6(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right to any of its security holders. (d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an effective Registration Statement covering all of the Registrable Securities and the Underlying Shares, the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each holder of Registrable Securities written notice of such determination and, if within twenty (20) days after receipt of such notice, any such holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered; PROVIDED, HOWEVER, that the Company shall not be required to register any Registrable Securities pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k) of the Commission. (e) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least two-thirds of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. -14- (f) NOTICES. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92618 Facsimile No.: (949) 859-5241 Attn: Chief Financial Officer With copies to: Rutan & Tucker LLP 611 Anton Boulevard, 14th floor Costa Mesa, CA 92626-1998 Facsimile No.: (714) 546-9035 Attn: Thomas G. Brockington, Esq. If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. -15- If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (h) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (i) GOVERNING LAW. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (j) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (k) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. -16- (l) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (m) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE TO FOLLOW] -17- IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN ----------------------------------------- Name: Colette Cozean Title: CEO STRONG RIVER INVESTMENTS, INC. By: /S/ KENNETH L. HENDERSON ----------------------------------------- Kenneth L. Henderson Attorney-in-Fact Address for Notice: Strong River Investments, Inc. c/o Cavallo Capital Corp. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Facsimile No.: (212) 332-3256 Attn: Avi Vigder HERKIMER LLC By: /S/ L. FARRINGTON /S/ JUDITH PATRICK ----------------------------------------- Name: Title: Address for Notice: c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies Facsimile No.: (345) 945-7566 -18- with a copy to: Southridge Capital Management LLC Executive Pavillon 20 Grove Street Ridgefield, CT 06877 Facsimile No.: (203) 431-8301 With copies for communications to any Purchaser to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson, Esq. Eric L. Cohen. Esq. ANNEX A ------- PLAN OF DISTRIBUTION -------------------- The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o short sales; o broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The Selling Stockholders may also engage in short sales against the box, puts and calls and other transactions in securities of the Company or derivatives of Company securities and may sell or deliver shares in connection with these trades. The Selling Stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a Selling Stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Company is required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the Selling Stockholders. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. SCHEDULE 6(b) TO REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS - ------------------- 1. Wound Healing of Oklahoma (relating to shares not yet issued). 2. Corneal Contouring Development (relating to shares not yet issued). 3. Data.Site/RSS (relating to approximately 160,000 shares of Common Stock, possibly now eligible for Rule 144K). 4. Silicon Valley Bank (relating to warrant to purchase approximately 10,000 shares of Common Stock). 5. Josephthal, Lyon & Ross (relating to warrant to purchase 150,000 shares). 6. Registration rights issued to shareholders of OIS. 7. Class B Warrant holders have registration rights (not "piggyback" registration rights). EX-10.30 4 WARRANT DATED MAY 17, 1999 EXHIBIT D NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. PREMIER LASER SYSTEMS, INC. WARRANT ------- Dated: May 17, 1999 Premier Laser Systems, Inc., a California corporation (the "Company"), hereby certifies that, for value received, [ ],or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 30,000 shares of Class A Common Stock, no par value (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $3.135 per share (as adjusted from time to time as provided in Section 9, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including May 17, 2004 (the "Expiration Date"), and subject to the following terms and conditions: 1. REGISTRATION OF WARRANT. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. DURATION AND EXERCISE OF WARRANTS. (a) This Warrant shall be exercisable by the registered Holder on any business day before 6:30 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant without the prior written consent of the Holder. (b) Subject to Sections 2(b), 6 and 10, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. -2- (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. [Intentionally left blank] 5. DEMAND REGISTRATION RIGHTS. At any time during the term of this Warrant when the Warrant Shares are not registered pursuant to an effective registration statement, the Holder may make a written request for the registration under the Securities Act (a "Demand Registration"), of all of the Warrant Shares (the "Registrable Securities"), and the Company shall use its best efforts to effect such Demand Registration as promptly as possible, but in any case within 90 days thereafter. Any request for a Demand Registration shall specify the aggregate number of Registrable Securities proposed to be sold and shall also specify the intended method of disposition thereof. The right to cause a registration of the Registrable Securities under this Section 5 shall be limited to one such registration. In any registration initiated as a Demand Registration, the Company will pay all of its registration expenses in connection therewith. A Demand Registration shall not be counted as a Demand Registration hereunder until the registration statement filed pursuant to the Demand Registration has been declared effective by the Securities and Exchange Commission and maintained continuously effective for a period of at least 360 days or such shorter period when all Registrable Securities included therein have been sold in accordance with such registration statement, provided, however that any days on which such registration statement is not effective or on which the Holder is not permitted by the Company or any governmental authority to sell Warrant Shares under such registration statement shall not count towards such 360 day period. 6. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 8. RESERVATION OF WARRANT SHARES. The Company covenants that it will at all times reserve and keep available out of the aggregate of its -3- authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 9. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9. Upon each such adjustment of the Exercise Price pursuant to this Section 9, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 9(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. -4- (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock (other than the shares of Common Stock permitted to be issued pursuant to Section 3.18(ii) of the Secured Convertible Debenture Purchase Agreement, of even date herewith to which the Company and the original Holder are parties, in satisfaction of the litigation described in Schedule 2.1(g) to such Purchase Agreement, (ii) shares of Common Stock issuable upon the exercise of warrants, options or rights outstanding on the date hereof and (iii) other than the rights, options and warrants outstanding prior to the date hereof described in Schedule 2.1(c) of the Purchase Agreement, but not any modifications thereto) for a consideration per share less than the market price of the Common Stock then in effect, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance, and (ii) the number of shares of Common Stock which the aggregate consideration received (or to be received, assuming exercise or conversion in full of such rights, warrants and convertible securities) for the issuance of such additional shares of Common Stock would purchase at the market price of the Common Stock at the time of such issuance, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. However, upon the expiration of any such right or warrant to acquire shares of Common Stock the issuance of which resulted in an adjustment in the Exercise Price pursuant to this Section, if any such right or warrant shall expire and shall not have been exercised, the Exercise Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Exercise Price made pursuant to the provisions of this Section after the issuance of such rights or warrants) had the adjustment of the Exercise Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase of only that number of shares of the Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. -5- (e) For the purposes of this Section 9, the following clauses shall also be applicable: (i) RECORD DATE. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) Whenever the Exercise Price is adjusted pursuant to Section 9(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (h) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or -6- (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 10. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise Price in one of the following manners: (a) CASH EXERCISE. The Holder shall deliver immediately available funds; or (b) CASHLESS EXERCISE. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: -7- X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 11. FRACTIONAL SHARES. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 11, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. NOTICES. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 3 Morgan, Irvine, CA 92618, Attention: Chief Financial Officer, or to Facsimile No. (949) 859-5241, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 12. 13. WARRANT AGENT. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any -8- corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. MISCELLANEOUS. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] -9- IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN ----------------------------------- Name: Colette Cozean --------------------------------- Title: CEO -------------------------------- FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To Premier Laser Systems, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Class A Common, no par value, of Premier Laser Systems, Inc. (the "Common Stock") and , if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ________________________________________ ________________________________________________________________________________ (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ ________________________________________________________________________________ Dated:__________,____ Name of Holder: (Print)________________________________ (By:)__________________________________ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Premier Laser Systems, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Premier Laser Systems, Inc. with full power of substitution in the premises. Dated: - ---------------, ---- --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-10.31 5 INTELLECTUAL PROPERTY SECURITY AGREEMENT INTELLECTUAL PROPERTY SECURITY AGREEMENT ---------------------------------------- INTELLECTUAL PROPERTY SECURITY AGREEMENT, dated as of May 17, 1999, between Premier Laser Systems, Inc., a California corporation ("Premier"), and the secured parties signatory hereto, and their respective endorsees, transferees and assigns (collectively the "Secured Party"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to a Secured Convertible Debenture Purchase Agreement, dated the date hereof among Premier and the Secured Party (the "PURCHASE AGREEMENT"), Premier has agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Premier an aggregate principal amount of $4,000,000 of Premier's 6% Secured Convertible Debentures (the "DEBENTURES"), which are convertible into shares of Premier's Class A Common Stock, no par value (the "COMMON STOCK"). In connection therewith, Premier shall issue to the Secured Party Common Stock purchase warrants of even date herewith to purchase an aggregate of 60,000 shares of Common Stock (the "WARRANTS"); and WHEREAS, in order to induce the Secured Party to purchase the Debentures, Premier has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a first priority security interest in certain general intangible property of Premier to secure the prompt payment, performance and discharge in full of all of Premier's obligations under the Debentures and the exercise and discharge in full of all of Premier's obligations under the Warrants. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "GENERAL INTANGIBLES" and "PROCEEDS") shall have the respective meanings given such terms in Article 9 of the UCC. (a) "CLASS B WARRANTS" means the Company's Class B Warrants, entitling the holders thereof to purchase an aggregate of 7,592,460 shares of Common Stock. (b) "COLLATERAL" means all of the Company's right, title and interest in and to all of Trademarks, Patents, Copyrights, and other general intangible property of the Company, all trade secrets, intellectual property rights in computer software and computer software products, design rights which may be available to the Company, rights to proceeds arising from any and all claims for damages by way of past, present and future infringement of any Collateral with the right but not the obligation to sue on behalf of and collect such damages for said use or infringement, licenses to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights. The term "Collateral" shall include all of the foregoing items, whether presently owned or existing or hereafter acquired or coming into existence, all additions and accessions thereto, all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including without limitation all proceeds from the licensing or sale or other transfer of Collateral and of insurance covering the same and of any tort claims in connection therewith. (c) "COMPANY" shall mean, collectively, Premier and all of the subsidiaries of Premier, other than Ophthalmic Imaging Systems, Inc. (d) "COPYRIGHTS" means any and all copyrights, copyright applications, copyright registration and like protections in each work or authorship and derivative work thereof that is created by the Company, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held, including, without limitation, those set forth on Exhibit A attached hereto. (e) "OBLIGATIONS" means all of the Company's obligations under this Agreement, the Debentures and the Warrants, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. (f) "PATENTS" means all of the Company's patents, patent applications, letters patent and like protections of the United States of America, including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, and including, without limitation, those set forth on EXHIBIT B attached hereto. (g) "QUALIFIED FACILITY" means a credit facility or factoring arrangement with a nationally or regionally recognized institutional lender without conditions or restrictions (including with respect to borrowing base requirements) as to availability of funds to the Company, whereby such lender has required the Company to grant to it a first priority security interest in the Collateral, loans under which facility shall not be subject to repayment for at least 364 calendar days. -2- (h) "QUALIFIED INCOME SOURCE" means any of (i) licensing or royalty arrangements whereby the Company has received prepaid licensing or royalty fees, (ii) deposits or prepaid distribution arrangements received by the Company, (iii) non-refundable net proceeds from the exercise of Class B Warrants, (iv) non-refundable cash proceeds, net of applicable taxes and other expenses, from the settlement of or judgment from, any of the litigation specified in SCHEDULE 1(h) hereto, and (v) a Qualified Facility. (i) "TRADEMARKS" means any trademark, service mark right, whether or not registered, applications to register and registrations of the same and like protections, and the entire goodwill of the business of the Company connected with or symbolized by such trademarks, including, without limitation, those set forth on Exhibit C attached hereto. (j) "TWO THIRDS-IN-INTEREST" means one or more of the secured party signatories hereto holding in excess of 66.66% of the aggregate principal amount of the Debentures outstanding, determined on a cumulative basis. (k) "UCC" means the Uniform Commercial Code, as currently in effect in the State of California. 2. GRANT OF SECURITY INTEREST. As an inducement for the Secured Party to purchase the Debentures and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing security interest in, a first lien upon and a right of set-off against all of the Company's right, title and interest of whatsoever kind and nature in and to the Collateral (the "SECURITY INTEREST"). 3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to, and covenants and agrees with, the Secured Party as follows: (a) The Company has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. (b) Except as specified in SCHEDULE 3(b), the Company is the sole owner of the Collateral (except for non-exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect and other than -3- pursuant to Section 10 hereof, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement). (c) EXHIBIT A sets forth a true and complete list of all registered Copyrights and any applications thereto in existence as of the date of this Agreement. EXHIBIT B sets forth a true and complete list of all pending Patent applications that have been filed and all Patents that have been issued as of the date of this Agreement. EXHIBIT C sets forth a true and complete list of all Trademark registered and pending Trademark applications filed, in each case, in the United States of America as of the date of this Agreement. The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party in writing of any change in the composition of the Collateral, including, without limitation, any subsequent ownership rights of the Company in or to any Copyright, Patent or Trademark. (d) Each of the Patents, Trademarks and Copyrights is valid and enforceable in the United States of America, and no part of the Collateral has been judged invalid or unenforceable. There has been no adverse decision to the Company's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company's right to keep and maintain such Collateral in full force and effect, and, except as set forth in Schedule 3(d) there is no proceeding involving said rights pending or, to the best knowledge of the Company, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and may not relocate such books of account and records unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party valid, perfected and continuing first priority liens in the Collateral. The principal place of business of the Company is located at the address set forth in the introduction to this Agreement. (f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral, including the Collateral listed on the Exhibits hereto, securing the payment and performance of the Obligations, and, upon making the filings described in the immediately following sentence, a perfected first priority security interest in such Collateral. Except for (x) the filing of this Agreement with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the filing of this Agreement with the Register of Copyrights with respect to the Copyrights, and (y) the filing of financing statements on Form UCC-1 under the UCC with the jurisdictions indicated in SCHEDULE B, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body located in the United States of America is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of or exercise by the Secured Party of its rights and remedies hereunder. The Company acknowledges and agrees that a copy of this Agreement (or instruments executed and delivered pursuant hereto) will be filed and recorded with each of the United States Patent and Trademark Office and the Register of Copyrights with respect to the Patents, Trademarks and Copyrights that are now or hereafter in existence. -4- (g) On the date of execution of this Agreement, the Company will deliver to the Secured Party (i) one or more executed UCC financing statements on Form UCC-1 with respect to the Security Interest for filing with the jurisdictions indicated on SCHEDULE B, attached hereto and in such other jurisdictions as may be requested by the Secured Party and (ii) one or more executed recordation sheets relating to the filing and recording of this Agreement with each of the United States Patent and Trademark Office and the Register of Copyrights with respect to the Patents, Trademarks and Copyrights that are now in existence. (h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Company is a party or by which the Company is bound. No consent (including, without limitation, from stock holders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder. (i) The Company shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority (subject to subordination pursuant to Section 10 hereof) liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 10. The Company shall safeguard and protect all Collateral for the account of the Secured Party and the Company hereby agrees to defend the Collateral (provided, that with respect to the Patents that are included within the definition of Collateral, such Patents will, for the sole and exclusive purpose of any defense under this Section 3(i), be limited to the Patents specified on SCHEDULE 3(i)) and the first priority liens and Security Interests created and granted under this Agreement against any and all persons. At the request of the Secured Party, the Company will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC (or any other applicable statute) in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Company shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interest hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder. The Patents listed on SCHEDULE 3(i) are the only Patents that are material to the conduct of the business of the Company. (j) Except as permitted by the Purchase Agreement, the Company will not allow any Collateral to be abandoned, forfeited or dedicated to the public without the prior written consent of the Secured Party. The Company will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Company in the ordinary course of business), sell or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party. (k) The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein. -5- (l) The Company shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time. (m) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (n) The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. (o) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date furnished. (p) SCHEDULE A, attached hereto contains a list of all of the subsidiaries of Premier. 4. DEFAULTS. The following events shall be "EVENTS OF DEFAULT": (a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures; (b) Any representation or warranty of the Company in this Agreement or in the Security Agreement, dated the date hereof between the Company and the Secured Party, shall prove to have been incorrect in any material respect when made; (c) The failure by the Company to observe or perform any of its obligations hereunder or in the Security Agreement, dated the date hereof between the Company and the Secured Party, for ten (10) days after receipt by the Company of notice of such failure from the Secured Party; and (d) Any breach or default under the Warrants. 5. DUTY TO HOLD IN TRUST. Upon the occurrence of any Event of Default and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. -6- 6. RIGHTS AND REMEDIES UPON DEFAULT. Upon occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debentures and the Warrants, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then located). Without limitation, the Secured Party shall have the following rights and powers: (a) The Secured Party shall have the right to take possession of all tangible manifestations or embodiments of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company's premises or elsewhere. (b) The Secured Party shall have the right to operate the business of the Company using the Collateral and shall have the right to assign, sell, or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released. (c) The Secured Party may license or, to the same extent the Company is permitted by law and contract to do so, sublicense, whether on an exclusive or non-exclusive basis, any of the Collateral throughout the world for such term, on such conditions and in such manner as the Secured Party shall, in its sole discretion, determine. (d) The Secured Party may (without assuming any obligations or liabilities thereunder), at any time, enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of the Company in, to and under any license agreement with respect to such Collateral, and take or refrain from taking any action thereunder. (e) The Secured Party may, in order to implement the assignment, license, sale or other disposition of any of the Collateral pursuant to this Section, pursuant to the authority provided for in Section 11, execute and deliver on behalf of the Company one or more instruments of assignment of the Collateral in form suitable for filing, recording or registration in any jurisdictions as the Secured Party may determine advisable. 7. APPLICATIONS OF PROCEEDS; EXPENSES. (a) The proceeds of any such sale, lease, license or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and -7- preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, secured parties signatory hereto will be entitled to their pro rata portion of such proceeds (determined by reference to the aggregate principal amount of Debentures outstanding, determined on a cumulative basis), and the Company will be liable for the deficiency, together with interest thereon, at the rate of 17% per annum (the "DEFAULT RATE"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. (b) The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including, without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate. 8. RESPONSIBILITY FOR COLLATERAL. The Company assumes all liabilities and responsibility in connection with all Collateral, and the obligations of the Company hereunder or under the Debentures and the Warrants shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 9. SECURITY INTEREST ABSOLUTE. All rights of the Secured Party and all Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, the Warrants or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, the Warrants or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured -8- Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 10. TERM OF AGREEMENT AND SUBORDINATION OF SECURITY INTEREST. (a) This Agreement and the Security Interest shall terminate on the earlier of (A) subject to the provisions of the immediately following sentence, the date of the receipt by the Secured Party of evidence satisfactory to it that the Company has received a minimum of $4,000,000 in bona fide funds from a Qualified Income Source which shall not be subject to repayment prior to the later to occur of (i) the 364th calendar day following the obtainment of such funds and (ii) the 270th day following the date that an Underlying Shares Registration Statement (as defined in the Debentures) is first declared effective by the Securities and Exchange Commission, and (B) the date on which all payments under the Debentures have been made in full and all other Obligations have been paid or discharged. Notwithstanding the foregoing and anything to the contrary contained herein, in no event shall this Agreement or the Security Interest terminate prior to the date that an Underlying Shares Registration Statement is first declared effective by the Securities and Exchange Commission. (b) If the Company shall have entered into a Qualified Facility for in excess of $500,000, then the Security Interest shall, subject to terms mutually acceptable to the Company and the Secured Party, become subordinate to any security interest granted to such lender pursuant to such Qualified Facility. (c) Upon any termination or subordination of the Security Interest pursuant to this Section 10, the Secured Party, at the request and at the expense of the Company, will join in executing an appropriate amendment or termination statement (as the case may be) with respect to any financing statement executed and filed pursuant to this Agreement. 11. POWER OF ATTORNEY; FURTHER ASSURANCES. (a) The Company authorizes the Secured Party, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Company's true and lawful attorney-in-fact, with power, in -9- its own name or in the name of the Company, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the Company's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement, the Debentures and the Warrants, all as fully and effectually as the Company might or could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B, attached hereto, all such instruments, including appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademark Office and the Register of Copyrights, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Collateral. (c) The Company hereby irrevocably appoints the Secured Party as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) To modify, in its sole discretion, this Agreement without first obtaining the Company's approval of or signature to such modification by amending EXHIBIT A, EXHIBIT B AND EXHIBIT C, hereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by the Company after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which the Company no longer has or claims any right, title or interest; and (ii) To file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law. -10- 12. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses: If to the Company: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92618 Facsimile No.: (949) 859-5241 Attn: Chief Financial Officer With copies to: Rutan & Tucker LLP 611 Anton Boulevard, 14th floor Costa Mesa, CA 92626-1998 Facsimile No.: (714) 546-9035 Attn: Thomas G. Brockington, Esq. If to the Secured Party to the address for notice set forth below such Secured Party's name on the signature page hereto. 13. OTHER SECURITY. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 14. ACTIONS BY THE SECURED PARTY. Any action required or permitted hereunder to be taken by or on behalf of the secured parties signatory hereto shall, for such action to be valid, require the approval of the Two Thirds-in-Interest prior to the taking of such action. If the consent, approval or disapproval of the secured parties signatory hereto is required or permitted pursuant to this Agreement, such consent, approval or disapproval shall only be valid if given by the Two Thirds-in-Interest. 15. MISCELLANEOUS. (a) No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. -11- (b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto. (d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submit to the exclusive jurisdiction of any New York State or United States Federal court sitting in Manhattan county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non convenient. -12- (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. * * * * * * * * * * * -13- IN WITNESS WHEREOF, the parties hereto have caused this Intellectual Property Security Agreement to be duly executed on the day and year first above written. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN --------------------------------- Name: Colette Cozean Title: CEO SECURED PARTY: STRONG RIVER INVESTMENTS, INC. By: /S/ KENNETH L. HENDERSON --------------------------------- Kenneth L. Henderson Attorney-in-Fact Address for Notice: Strong River Investments, Inc. c/o Cavallo Capital Corp. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Facsimile No.: (212) 332-3256 Attn: Avi Vigder HERKIMER LLC By: /S/ L. FAMINGTON /S/ JUDITH PATRICK ------------------------------------ Name: CT Corporation Ltd. Title: Director Address for Notice: c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies Facsimile No.: (345) 945-7566 -14- with a copy to: Southridge Capital Management LLC Executive Pavillon 20 Grove Street Ridgefield, CT 06877 Facsimile No.: (203) 431-8301 With copies for communications to Secured Party to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson, Esq. Eric L. Cohen. Esq. EXHIBIT A to Intellectual Property Security Agreement Copyright Registrations and Applications Therefor None STATUS REPORT FOR PREMLS U.S. ISSUED PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001FW1 MEDICAL LASER INTERCONNECT SYSTEM USA ISSUED 07/568549 08/16/90 5116329 05/26/92 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.002W1 FILBER OPTIC APPARATUS FOR USE WITH USA ISSUED 07/803919 12/06/91 5207673 05/04/93 MEDICAL LASERS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.009FW4 TRANSPARENT LASER SURGICAL PROBE USA ISSUED 08/419511 04/07/95 5688261 11/18/97 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.011FW4 CONTACT TIP FOR LASER SURGERY USA ISSUED 08/457992 06/01/95 5707368 01/13/98 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.013A OPTICS FOR MEDICAL LASER USA ISSUED 07/644074 01/18/91 5198926 03/30/93 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.013DV1 OPTICS FOR MEDICAL LASER USA ISSUED 08/021354 02/23/93 5289557 02/22/94 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018DV1 MULTIWAVELENGTH MEDICAL LASER USA ISSUED 07/917589 07/17/92 5304167 04/19/94 METHOD - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018FW2 MULTIWAVELENGTH MEDICAL LASER USA ISSUED 07/754327 09/04/91 5139494 08/18/92 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018FW4 METHOD OF LASER SURGERY USING USA ISSUED 08/422648 04/14/95 5540676 07/30/96 MULTIPLE WAVELENGTHS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.024FW1 MEDICAL LASER APPARATUS FOR USA ISSUED 08/075720 06/11/93 5349590 09/20/94 DELIVERING HIGH POWER INFRARED LIGHT - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.031FW2 CORNEAL SCULPTING USING LASER USA ISSUED 08/384243 02/06/95 5741245 04/21/98 ENERGY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033DV1 APPARATUS AND METHOD FOR USA ISSUED 08/455732 05/31/95 5738677 04/14/98 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.046A LASER SURGICAL METHOD USA ISSUED 07/763350 09/20/91 5267856 12/07/93 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050A HIGH REPETITION RATE MID-INFRARED USA ISSUED 08/240255 05/10/94 5422899 06/06/95 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.052A METHOD AND APPARATUS FOR USA ISSUED 972531 11/06/92 5300065 04/05/94 SIMULTANEOUSLY HOLDING AND SEALING TISSUE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.053A METHOD AND APPARATUS FOR APPLYING USA ISSUED 972532 11/06/92 5290278 03/01/94 THERMAL ENERGY TO LUMINAL TISSUE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.055FW3 LASER SURGICAL METHOD USING USA ISSUED 08/391612 02/21/95 5722970 03/03/98 TRANSPARENT PROBE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.0556A METHOD AND APPARATUS FOR APPLYING USA ISSUED 972530 11/06/92 5336221 08/09/94 THERMAL ENERGY TO TISSUE USING A CLAMP - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.059A OPTICAL HEATING SYSTEM USA ISSUED 997554 12/28/92 5354323 10/11/94 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.060A METHOD AND APPARATUS FOR SEALING USA ISSUED 981197 11/25/92 5364389 11/15/94 AND/OR GRASPING LUMINAL TISSUE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.063A LASER SURGICAL PROCEDURES FOR USA ISSUED 08/633670 04/17/96 5865831 02/02/99 TREATMENT OF GLAUCOMA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.075A LASER HEALING METHOD USA ISSUED 06/539527 10/06/83 4672969 06/16/87 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.076A LASER HEALING METHOD AND USA ISSUED 07/062861 06/16/87 4854320 08/08/89 APPARATUS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.077A METHOD FOR CLOSING TISSUE WOUNDS USA ISSUED 07/380622 07/14/89 5002051 03/26/91 USING RADIATIVE ENERGY BEAMS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.078A LASER HEALING METHOD AND USA ISSUED 07/639025 01/09/91 5140984 08/25/92 APPARATUS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.079A METHOD FOR CLOSING TISSUE WOUNDS USA ISSUED 07/934167 08/24/92 5409479 04/25/95 USING RADIATIVE ENERGY BEAMS - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135A METHOD AND APPARATUS FOR USA ISSUED 08/279506 07/22/94 5520631 05/28/96 LOWERING THE INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135CP1 METHOD AND APPARATUS FOR USA ISSUED 08/570400 12/11/95 5704907 01/06/98 LOWERING THE INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136A METHOD FOR SURGICALLY RE-PROFILING USA ISSUED 07/450672 12/14/89 5063942 11/12/91 THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136CP1 METHOD FOR SURGICALLY RE-PROFILING USA ISSUED 07/762866 09/18/91 5318044 06/07/94 THE CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136CP3 METHOD AND APPARATUS FOR RE- USA ISSUED 08/345245 11/28/94 5591185 01/07/97 PROFILING OR SMOOTHING THE ANTERIOR OR STROMAL CORNEA USING SCRAPING - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136CPF2 METHOD AND APPARATUS FOR USA ISSUED 08/170679 12/20/93 5368604 11/29/94 SURGICALLY PROFILING THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136DC1 APPARATUS FOR SURGICALLY RE- USA ISSUED 07/979424 11/19/92 5395385 03/07/95 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR PREMLS U.S. PENDING PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.009DV1 LASER SURGICAL PROBE USA PENDING 08/841865 05/05/97 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.011DV1 CONTACT TIP FOR LASER SURGERY USA PENDING 08/455061 05/31/95 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.049FW2 DENTAL LASER SURGERY APPARATUS USA PENDING 08/882362 06/25/97 AND METHOD - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050DFC1 HIGH REPETITION RATE MID-INFRARED USA PENDING 08/979213 11/26/97 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050DV2 HIGH REPETITION RATE MID-INFRARED USA PENDING 08/931600 09/17/97 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.063DV1 LASER SURGICAL PROCEDURES FOR USA PENDING 09/169258 10/09/98 TREATMENT OF GLAUCOMA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.112A OPTICAL SOURCE AND METHOD USA PENDING 05/03/99 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135CP2 METHOD AND APPARATUS FOR USA PENDING 08/998875 12/24/97 LOWERING THE INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.146A OCCULAR FUNDUS CAMERA USA PENDING 09/186710 11/05/98 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.31FDV1 CORNEAL SCULPTING USING LASER USA PENDING 08/455899 05/31/95 ENERGY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.33F3C1 APPARATUS AND METHOD FOR USA PENDING 09/018373 02/04/98 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR PREMLS FOREIGN ISSUED PATENTS - ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VAU MEDICAL LASER INTERCONNECT SYSTEM AUSAL ISSUED 43601/89 10/19/89 612910 12/03/91 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VCA MEDICAL LASER INTERCONNECT SYSTEM CANAD ISSUED 2000916 10/18/89 2000916 01/17/95 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VEP MEDICAL LASER INTERCONNECT SYSTEM EPO ISSUED 89310520.5 10/13/89 0365228 12/14/94 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VNO MEDICAL LASER INTERCONNECT SYSTEM NORW ISSUED 894170 10/19/89 178842 06/19/96 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VPT MEDICAL LASER INTERCONNECT SYSTEM PORTG ISSUED 92021 10/18/89 92021 10/09/95 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.002VAU FIBER OPTIC APPARATUS FOR USE WITH AUSAL ISSUED 56921/90 06/07/90 613560 12/11/91 MEDICAL LASERS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.002VCA FIBER OPTIC APPARATUS FOR USE WITH CANAD ISSUED 2018450 06/07/90 2018450 05/09/95 MEDICAL LASERS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.002VKR FIBER OPTIC APPARATUS FOR USE WITH KORSO ISSUED 90-7829 05/30/90 55974 11/02/92 MEDICAL LASERS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018VAU MULTIWAVELENGTH MEDICAL LASER AUSAL ISSUED 44520/89 11/09/89 626339 02/01/93 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018VCA MULTIWAVELENGTH MEDICAL LASER CANAD ISSUED 2002453 11/08/89 2002453 01/17/95 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018VPT MULTIWAVELENGTH MEDICAL LASER PORTG ISSUED 92240 11/09/89 92240 05/03/95 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033RAU APPARATUS AND METHOD FOR AUSAL ISSUED 28572/97 04/01/93 699994 04/01/99 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033VAU APPARATUS AND METHOD FOR AUSAL ISSUED 40486/93 04/01/93 678967 10/09/97 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VAU HIGH REPETITION RATE MID-INFRARED AUSAL ISSUED 17964/95 05/09/95 685593 05/07/98 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VEP HIGH REPETITION RATE MID-INFRARED EPO ISSUED 95302891.7 04/28/95 0682389 09/02/98 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VIL HIGH PULSE REPETITION AND ITS USE ISREA ISSUED 113501 04/26/95 113501 05/19/97 (AMENDED TITLE) - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.053QAU METHOD AND APPARATUS FOR APPLYING AUSAL ISSUED 53643/94 10/19/93 684054 03/26/98 THERMAL ENERGY TO LUMINAL TISSUE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.056VAU CLAMP AND METHOD FOR APPLYING AUSAL ISSUED 53607/94 10/14/93 682324 01/22/98 THERMAL ENERGY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.060VAU METHOD AND APPARATUS FOR SEALING AUSAL ISSUED 56699/94 11/16/93 684057 03/26/98 LUMINAL TISSUE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HEP APPARATUS FOR SURGICALLY PROFILING EPO ISSUED 91920409.9 09/16/91 0551439 08/09/95 THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HMX APPARATUS FOR SURGICALLY PROFILING MEXIC ISSUED 911426 10/03/91 177228 03/15/95 THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HZA METHOD AND APPARATUS FOR SOFRC ISSUED 91/7835 10/01/91 91/7835 08/26/92 SURGICALLY PROFILING THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136QEP APPARATUS FOR RE-PROFILING THE EPO ISSUED 92920651.4 09/17/92 0680298 01/21/98 CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136QMX METHOD AND APPARATUS FOR RE- MEXIC ISSUED 925239 09/14/92 178296 06/07/95 PROFILING THE CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VCN APPARATUS FOR SURGICALLY RE- CHINA ISSUED 90110433.7 12/14/90 42198 07/24/98 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VKR APPARATUS FOR RE-PROFILING THE KORSO ISSUED 92-701415 12/12/90 156727 07/23/98 CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VMX APPARATUS FOR SURGICALLY RE- MEXIC ISSUED 23746 12/14/90 167844 04/15/93 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VRU METHOD AND APPARATUS FOR RUSSA ISSUED 5052732 12/12/90 2094032 10/27/97 SURGICALLY RE-PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VZA METHOD AND APPARATUS FOR SOFRC ISSUED 90/10063 12/14/90 90/10063 11/27/91 SURGICALLY RE-PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR PREMLS PENDING FOREIGN PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VDK MEDICAL LASER INTERCONNECT SYSTEM DENMR PENDING 5185/89 10/19/89 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VF1 MEDICAL LASER INTERCONNECT SYSTEM FINLN PENDING 894978 10/19/89 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VJE MEDICAL LASER INTERCONNECT SYSTEM IRELN PENDING 3351/89 10/18/89 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.001VJP1 MEDICAL LASER INTERCONNECT SYSTEM JAPAN PENDING 282818/89 10/30/89 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.002VJP FIBER OPTIC APPARATUS FOR USE WITH JAPAN PENDING 151431/90 06/08/90 MEDICAL LASERS - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.009QCA LASER SURGICAL PROBE CANAD PENDING 2107687 04/03/92 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.009QEP LASER SURGICAL PROBE EPO PENDING 92910340.6 04/03/92 - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018VIE MULTIWAVELENGTH MEDICAL LASER IRELN PENDING 3594/89 11/08/89 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.018VJP MULTIWAVELENGTH MEDICAL LASER JAPAN PENDING 292115/89 11/09/89 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.031VEP CORNEAL SCULPTING USING LASER EPO PENDING 93903487.2 01/14/93 ENERGY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.031VJP CORNEAL SCULPTING USING LASER JAPAN PENDING 513266/1993 01/14/93 ENERGY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033VCA APPARATUS AND METHOD FOR CANAD PENDING 2117765 04/01/93 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033VEP APPARATUS AND METHOD FOR EPO PENDING 93911621.6 04/01/93 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033VJP APPARATUS AND METHOD FOR JAPAN PENDING 518505/1993 04/01/93 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.033VKR APPARATUS AND METHOD FOR KORSO PENDING 94-703632 04/01/93 PERFORMING EYE SURGERY - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050RAU HIGH REPETITION RATE MID-INFRARED AUSAL PENDING 63510/98 05/09/95 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VCA HIGH REPETITION RATE MID-INFRARED CANAD PENDING 2148395 05/02/95 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VJP PULSED OPTICALLY PUMPED LASER AND JAPAN PENDING 110517/1995 05/09/95 SURGICAL METHOD USING THE SAME (AMENDED TITLE) - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.050VKR HIGH REPETITION RATE MID-INFRARED KORSO PENDING 11234/1995 05/09/95 LASER - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135QAU APPARATUS FOR LOWERING THE AUSAL PENDING 58782/96 05/24/96 INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135QCA APPARATUS FOR LOWERING THE CANAD PENDING 2240146 05/24/96 INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135QEP APPARATUS FOR LOWERING THE EPO PENDING 96920501.2 05/24/96 INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135QJP APPARATUS FOR LOWERING THE JAPAN PENDING 522009/1997 05/24/96 INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.135QKR APPARATUS FOR LOWERING THE KORSO PENDING 98-704394 05/24/96 INTRAOCULAR PRESSURE OF AN EYE - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HCA METHOD AND APPARATUS FOR CANAD PENDING 2092285 09/16/91 SURGICALLY PROFILING THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HCN METHOD AND APPARATUS FOR CHINA PENDING 91109274.9 10/03/91 SURGICALLY PROFILING THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136HJP METHOD AND APPARATUS FOR JAPAN PENDING 518532/1991 09/16/91 SURGICALLY PROFILING THE CORNEA USING VACUUM - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136QCA METHOD AND APPARATUS FOR RE- CANAD PENDING 2119365 09/17/92 PROFILING THE CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136QCN METHOD AND APPARATUS FOR RE- CHINA PENDING 92110484.7 09/18/92 PROFILING THE CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136QOP METHOD AND APPARATUS FOR RE- JAPAN PENDING 506213/1993 09/17/92 PROFILING THE CORNEA TO CORRECT FOR HYPEROPIA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VBR METHOD AND APPARATUS FOR RE- BRAZL PENDING P19007915-9 12/12/90 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VCA METHOD AND APPARATUS FOR RE- CANAD PENDING 2071853 12/12/90 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VEP METHOD FOR SURGICALLY RE-PROFILING EPO PENDING 91902435.6 12/12/90 THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------ PREMLS.136VJP METHOD AND APPARATUS FOR RE- JAPAN PENDING 502814/1991 12/12/90 PROFILING THE CORNEA - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR EYESYS FOREIGN ISSUED PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.017XBX ABSOLUTE SCALE FOR CORNEAL BENLX ISSUED 68088-0 10/08/92 23121-00 04/21/93 TOPOGRAPHY - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.017XDE ABSOLUTE SCALE FOR CORNEAL GERWE ISSUED M9207467.7 10/09/92 M9207467.7 02/03/93 TOPOGRAPHY - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.017XFR ABSOLUTE SCALE FOR CORNEAL FRANC ISSUED 926338 10/09/92 0322610 12/31/92 TOPOGRAPHY - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.017XGB ABSOLUTE SCALE FOR CORNEAL UNIKN ISSUED 2026301 10/15/92 2026301 12/08/93 TOPOGRAPHY - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.017XJP ABSOLUTE SCALE FOR CORNEAL JAPAN ISSUED 29897/1992 10/12/92 925512 03/09/95 TOPOGRAPHY - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR EYESYS U.S. ISSUED PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.018A METHOD AND APPARATUS FOR VARIABLE USA ISSUED 08/044401 04/08/93 5418714 05/23/95 BLOCK SIZE INTERPOLATIVE CODING OF IMAGES - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.020FW1 METHOD OF REFRACTIVE SURGERY USA ISSUED 08/355436 12/13/94 5722427 03/03/98 - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.021FW1 MULTI-CAMERA CORNEAL ANALYSIS USA ISSUED 08/638875 04/25/96 5847804 12/08/98 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.13CPCP1 METHOD OF CORNEAL ANALYSIS USING A USA ISSUED 08/736348 10/23/96 5841511 11/24/98 CHECKERED PLACIDO APPARATUS - ------------------------------------------------------------------------------------------------------------------------------------
STATUS REPORT FOR EYESYS U.S. PENDING PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Application Filing Patent Issue Case Number Title of Invention Country Status Number Date Number Date - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.008A HANDHELD CORNEAL TOPOGRAPHY USA PENDING 09/001339 12/31/97 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.020FICI METHOD OF REFRACTIVE SURGERY USA PENDING 08/956878 10/23/97 - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.021FICI MULTI-CAMERA CORNEAL ANALYSIS USA PENDING 08/956515 10/23/97 SYSTEM - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.030A METHOD AND APPARATUS FOR USA PENDING 08/060826 05/10/93 PREDICTING CORNEAL ACUITY - ------------------------------------------------------------------------------------------------------------------------------------ EYESYS.13CPCPC METHOD OF CORNEAL ANALYSIS USING A USA PENDING 09/102839 06/23/98 CHECKERED PLACIDO APPARATUS - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE B TO INTELLECTUAL PROPERTY SECURITY AGREEMENT Jurisdictions where UCC-1 filings required - ------------------------------------------ 1. California Secretary of State SCHEDULE 1(h) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT Premier Laser Systems vs. Infrared Fiber Systems, Inc., Coherent, Inc., et al., as described in Item 3 to Annual Report on Form 10-K of Premier Laser Systems for the fiscal year ended March 31, 1998. SCHEDULE 3(b) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT Ownership of Collateral - ----------------------- 1. Under Agreement dated January 9, 1998 with Corneal Contouring Development LLC ("CCD"), PLS may be obligated to return technology relating to a corneal reprofiling device, if certain conditions are not met. This device is not presently marketed by PLS. CCD has a security interest in the assets pertaining to this product. 2. Under Agreement dated August 28, 1998 with Wound Healing of Oklahoma, Inc., PLS may be obligated to return technology relating to a device for lowering the intraocular pressure of the eye, if certain conditions are not met. This device is not presently marketed by PLS. 3. Under a Technology Transfer and Software License Agreement dated October 16, 1998 among Premier Laser Systems, Inc., Sarver and Associates, Inc. and Edwin Sarver, PLS may be required to return technology relating to mapping of the eye. This device is not presently marketed by PLS. 4. Joint ownership of patent for laser tip, with Michael Colvard. SCHEDULE 3(d) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT CURRENT MATTERS 1. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF V. INTERDENT, INC., A CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC., A CALIFORNIA CORPORATION. This is a patent infringement case filed 09/22/97 regarding a laser method for bleaching teeth. 2. Opposition against Premier Laser Systems application in the Patent and Trademark Office to registration of the trademark "Aurora", and objection to the further use of that name by Premier Laser Systems in connection with the sale of its products. OLD MATTERS WHICH MAY NO LONGER BE IN DISPUTE 3. Dr. Pelagalli: Letter alleging that he is an inventor of certain (unspecified) technology of Premier Laser. 4. Dr. Patricia Bath: Letter alleging that Premier infringes a patent. 5. Opticon: Letter alleging that Premier infringes a patent. 6. Dr. Rabinowitz: Letter alleging that Premier infringes copyright. 7. Dr. Berlin: Letter to his lawyer (not to Premier) alleging that Premier infringes a patent. SCHEDULE 3(i) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT List of Material Patents EXHIBIT B TO INTELLECTUAL PROPERTY SECURITY AGREEMENT List of Patents SCHEDULE A - FOREIGN TRADEMARK APPLICATIONS AND REGISTRATIONS
- ------------------------------------------------------------------------------------------------------------------------ COUNTRY Mark App. No. Reg. No. Class(es) Status App. Date Reg. Date - ------------------------------------------------------------------------------------------------------------------------ Australia ARAGO 771079 10 Pending. 08/21/98 - ------------------------------------------------------------------------------------------------------------------------ Australia ORION 771080 10 Pending. 08/21/98 - ------------------------------------------------------------------------------------------------------------------------ Australia SIRIUS 771081 10 Pending. 08/21/98 - ------------------------------------------------------------------------------------------------------------------------ Australia POLARIS 771082 771082 10 Registered. 08/21/98 04/06/99 - ------------------------------------------------------------------------------------------------------------------------ Australia ALTAIR 771083 771083 10 Registered. 08/21/98 04/06/99 - ------------------------------------------------------------------------------------------------------------------------ Australia AURORA 771084 771084 10 Registered. 08/21/98 04/06/99 - ------------------------------------------------------------------------------------------------------------------------ Australia CENTAURI 771085 10 Pending. 08/21/98 - ------------------------------------------------------------------------------------------------------------------------ Australia PEGASUS 771086 10 Pending. 08/21/98 - ------------------------------------------------------------------------------------------------------------------------ Australia DERMIUM 774012 774012 10 Registered. 09/23/98 02/12/99 - ------------------------------------------------------------------------------------------------------------------------ Brazil ARAGO 821022784 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil ORION 821022776 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil SIRIUS 821022768 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil POLARIS 821022733 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil ALTAIR 821022741 10 Pending. 08/29/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil AURORA 821022750 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil CENTAURI 821022806 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil PEGASUS 821022792 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ Brazil DERMIUM 821088777 10 Pending. 08/26/98 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ COUNTRY Mark App. No. Reg. No. Class(es) Status - ------------------------------------------------------------------------------------------------------------------------ Canada ARAGO 888187 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada ORION 888188 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada SIRIUS 888189 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada POLARIS 888190 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada ALTAIR 888191 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada AURORA 888192 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada CENTAURI 888193 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada PEGASUS 888194 9, 10, 35 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Canada DERMIUM 890293 10 Pending. 099/15/98 - ------------------------------------------------------------------------------------------------------------------------ European ARAGO 913657 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European ORION 913764 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European SIRIUS 913897 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European POLARIS 913723 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European ALTAIR 913632 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European AURORA 913798 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European CENTAURI 913749 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European PEGASUS 913822 9, 10, 35 Pending. Community 08/28/98 - ------------------------------------------------------------------------------------------------------------------------ European DERMIUM 958553 10 Pending. Community 09/18/98 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ COUNTRY Mark App. No. Reg. No. Class(es) Status - ------------------------------------------------------------------------------------------------------------------------ Japan ARAGO 072418/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan ORION 072419/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan SIRIUS 072420/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan POLARIS 072421/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan ALTAIR 072422/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan AURORA 072423/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan CENTAURI 072424/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan PEGASUS 072425/1998 10 Pending. 08/24/98 - ------------------------------------------------------------------------------------------------------------------------ Japan DERMIUM 079934/1998 10 Pending. 09/16/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea ARAGO 98-23694 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea ORION 98-23695 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea SIRIUS 98-23696 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea POLARIS 98-23697 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea ALTAIR 98-23698 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea AURORA 98-23699 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea CENTAURI 98-23700 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea PEGASUS 98-23701 10 Pending. 09/12/98 - ------------------------------------------------------------------------------------------------------------------------ South Korea DERMIUM 98-24079 10 Pending. 09/16/98 - ------------------------------------------------------------------------------------------------------------------------
EXHIBIT C TO INTELLECTUAL PROPERTY SECURITY AGREEMENT Trademarks SCHEDULE A TO INTELLECTUAL PROPERTY SECURITY AGREEMENT Subsidiaries - ------------ 1. EyeSys - Premier, Inc., a Delaware corporation 100% owned 2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation (Premier Laser Systems, Inc. is the sole member) 3. Data.Site, LLC, a California limited liability company (51% owned by Premier Laser Systems, Inc., now in the process of being shut down) 4. Ophthalmic Imaging Systems, a California corporation (51% owned by Premier Laser Systems, Inc.) Schedule B - U.S. Federal Trademark Applications
- ----------------------------------------------------------------------------------------------------- MARK APP. NO. REG. NO. CLASS(ES) Status APP. DATE REG. DATE - ----------------------------------------------------------------------------------------------------- ARAGO 75/307,008 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- ORION 75/307,502 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- SIRIUS 75/307,537 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- POLARIS 75/307,518 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- TOUCHTIPS 75/307,510 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- ANGLETIPS 75/307,503 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- ALTAIR 75/307,001 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- AURORA 75/307,276 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- CENTAURI 75/307,520 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- PEGASUS 75/307,155 9, 10 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- PREMIER LASER 75/307,501 9, 10 Pending. SYSTEMS, INC. 06/11/97 - ----------------------------------------------------------------------------------------------------- PREMIER 75/307,511 9 Pending. 06/11/97 - ----------------------------------------------------------------------------------------------------- THE SAFE 75/307,517 2,176,685 10 Registered. SYSTEM 06/11/97 07/28/98 - ----------------------------------------------------------------------------------------------------- PROCLOSURE 74/289,453 1,817,399 10 Registered. 06/29/92 01/18/94 - ----------------------------------------------------------------------------------------------------- LTM 74/284,041 1,832,072 10 Registered. 02/20/92 04/19/94 - ----------------------------------------------------------------------------------------------------- DENTISTRY FOR 75/318,632 10 Pending. THE 21ST 07/02/97 CENTURY - ----------------------------------------------------------------------------------------------------- PREMIER LASER 75/418,320 9, 10 Pending. 08/25/97 - ----------------------------------------------------------------------------------------------------- DERMIUM 75/458,345 10 Pending. 03/27/98 - ----------------------------------------------------------------------------------------------------- CELLPLANT 75/315,007 10 Pending. 06/26/97 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- MARK App. No. Reg. No. Class(es) Status - ----------------------------------------------------------------------------------------------------- DENTISTRY FOR 75/550,091 Pending. THE 21ST 09/08/98 CENTURY - ----------------------------------------------------------------------------------------------------- MEDICINE FOR 75/550,084 Pending. THE 21ST 09/08/98 CENTURY - -----------------------------------------------------------------------------------------------------
Schedule C - U.S. Federal Eyesys Trademark Registrations
- ----------------------------------------------------------------------------------------------------------------- Registration Registration MARK Number Date Class(es) Status - ----------------------------------------------------------------------------------------------------------------- PRO-FIT 2,136,132 02/10/98 9 Registered - ----------------------------------------------------------------------------------------------------------------- EYESYS 1,789,249 08/24/93 9, 10 Registered - ----------------------------------------------------------------------------------------------------------------- TOMORROW'S VISION 1,788,833 08/17/93 9, 10 Registered TODAY - -----------------------------------------------------------------------------------------------------------------
TITLE OF INVENTION COUNTRY PATENT NUMBER ------------------ ------- ------------- Medical Laser Interconnect System USA 5116329 Medical Laser Interconnect System AUSAL 612910 Medical Laser Interconnect System CANAD 2000916 Medical Laser Interconnect System EPO 0365228 Laser Surgical Method USA 5267856 Method for Surgically Re-Profiling the Cornea USA 5063942 Method for Surgically Re-Profiling the Cornea to USA 5318044 Correct For Hyperopia Apparatus for Re-Profiling the Cornea to EPO 0680298 Correct for Hyperopia Method and Apparatus for Surgically USA 5368604 Profiling the Cornea Apparatus for Surgically Profiling the EPO 0551439 Cornea Using Vacuum Apparatus for Surgically Re-Profiling the USA 5395385 Cornea Method and Apparatus for Reprofiling or USA 5591185 Smoothing the Anterior or Stromal Cornea Using Scraping Laser Healing Method USA 4672969 Laser Healing Method and Apparatus USA 4854320 Method for Closing Tissue Wounds Using USA 5002051 Radiative Energy Beams Laser Healing Method and Apparatus USA 5140984 Method for Closing Tissue Wounds Using USA 5409479 Radiative Energy Beams Optical Heating System USA 5354323 Method and Apparatus for Lowering the USA 5520631 Intraocular Pressure of an Eye Method and Apparatus for Lowering the USA 5704907 Intraocular Pressure of an Eye Title of Invention Country Patent Number ------------------ ------- ------------- Laser Surgical Procedures for Treatment of USA 5865831 Glaucoma Apparatus and Method for Performing Eye USA 5738677 Surgery Apparatus and Method for Performing Eye AUSAL 699994 Surgery Apparatus and Method for Performing Eye AUSAL 678967 Surgery Laser Surgical Method Using Transparent USA 5722970 Probe Transparent Laser Surgical Probe USA 5688261 High Repetition Rate Mid-Infrared Laser USA 5422899 High Repetition Rate Mid-Infrared Laser AUSAL 685593 High Repetition Rate Mid-Infrared Laser EPO 0682389 High Pulse Repetition and Its Use ISREA 113501 (Amended Title) Multiwavelength Medical Laser Method USA 5304167 Multiwavelength Medical Laser System USA 5139494 Method of Laser Surgery Using Multiple USA 5540676 Wavelengths Multiwavelength Medical Laser System AUSAL 626339 Multiwavelength Medical Laser System CANAD 2002453 Multiwavelength Medical Laser System PORTG 92240 Corneal Sculpting Using Laser Energy USA 5741245 Multi-Camera Corneal Analysis System USA 5847804
EX-10.32 6 SECURITY AGREEMENT DATED MAY 17, 1999 SECURITY AGREEMENT ------------------ SECURITY AGREEMENT, dated as of May 17, 1999, between Premier Laser Systems, Inc., a California corporation ("PREMIER"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "SECURED PARTY"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to a Secured Convertible Debenture Purchase Agreement, dated the date hereof among Premier and the Secured Party (the "Purchase Agreement"), Premier has agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Premier an aggregate principal amount of $4,000,000 of Premier's 6% Secured Convertible Debentures (the "Debentures"), which are convertible into shares of Premier's Class A Common Stock, no par value (the "Common Stock"). In connection therewith, Premier shall issue to the Secured Party a Common Stock purchase warrants of even date herewith to purchase an aggregate of 60,000 shares of Common Stock (the "Warrants"); and WHEREAS, in order to induce the Secured Party to purchase the Debentures, Premier has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a first priority security interest in certain property of Premier to secure the prompt payment, performance and discharge in full of all of Premier's obligations under the Debentures and the exercise and discharge in full of all of Premier's obligations under the Warrants. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "GENERAL INTANGIBLES" and "PROCEEDS") shall have the respective meanings given such terms in Article 9 of the UCC. (a) "CLASS B WARRANTS" means the Company's Class B Warrants, entitling the holders thereof to purchase an aggregate of 7,592,460 shares of Common Stock. (b) "COLLATERAL" means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith: (i) All Goods of the Company, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company's businesses and all improvements thereto (collectively, the "EQUIPMENT"); and (ii) All Inventory of the Company; and (iii) All of the Company's contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds (collectively, the "GENERAL INTANGIBLES"); and (iv) All Receivables of the Company including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit; and (v) All of the Company's documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(iv) above. (c) "COMPANY" shall mean, collectively, Premier and all of the subsidiaries of Premier, other than Ophthalmic Imaging Systems, Inc. (d) "OBLIGATIONS" means all of the Company's obligations under this Agreement, the Debentures and the Warrants, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later -2- increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. (e) "QUALIFIED FACILITY" means a credit facility or factoring arrangement with a nationally or regionally recognized institutional lender without conditions or restrictions (including with respect to borrowing base requirements) as to availability of funds to the Company, whereby such lender has required the Company to grant to it a first priority security interest in the Collateral, loans under which facility shall not be subject to repayment for at least 364 calendar days. (f) "QUALIFIED INCOME SOURCE" means(i) licensing or royalty arrangements whereby the Company has received prepaid licensing or royalty fees, (ii) deposits or prepaid distribution arrangements received by the Company, (iii) non-refundable net proceeds from the exercise of Class B Warrants, (iv) non-refundable cash proceeds net, of applicable taxes and other expenses, from the settlement of or judgment from the litigation specified in Schedule 1(f) hereto, and (V) a Qualified Facility. (g) "TWO THIRDS-IN-INTEREST" means one or more of the secured party signatories hereto holding in excess of 66.66% of the aggregate principal amount of the Debentures outstanding, determined on a cumulative basis. (h) "UCC" means the Uniform Commercial Code, as currently in effect in the State of California. 2. GRANT OF SECURITY INTEREST. As an inducement for the Secured Party to purchase the Debentures and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing security interest in, a first lien upon and a right of set-off against all of the Company's right, title and interest of whatsoever kind and nature in and to the Collateral (the "SECURITY INTEREST"). 3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to, and covenants and agrees with, the Secured Party as follows: (a) The Company has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. (b) The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on SCHEDULE A attached hereto; -3- (c) Except as specified in SCHEDULE 3(c), the Company is the sole owner of the Collateral (except for non-exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect and other than pursuant to Section 11 hereof, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement). (d) Except as specified in SCHEDULE 3(d), no written claim has been received that any Collateral or the Company's use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Company, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business at the locations set forth on SCHEDULE A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party valid, perfected and continuing first priority liens in the Collateral. (f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following sentence, a perfected first priority security interest in such Collateral. Except for the filing of financing statements on Form UCC-1 under the UCC with the jurisdictions indicated on SCHEDULE B, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body located in the United States of America is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of or exercise by the Secured Party of its rights and remedies hereunder. -4- (g) On the date of execution of this Agreement, the Company will deliver to the Secured Party one or more executed UCC financing statements on UCC-1 under the UCC with respect to the Security Interest for filing with the jurisdictions indicated on SCHEDULE B, attached hereto and in such other jurisdictions as may be requested by the Secured Party. (h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Company is a party or by which the Company is bound. No consent (including, without limitation, from stock holders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder. (i) The Company shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority (subject to subordination pursuant to Section 11 hereof) liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 11. The Company hereby agrees to defend the same against any and all persons. The Company shall safeguard and protect all Collateral for the account of the Secured Party. At the request of the Secured Party, the Company will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC (or any other applicable statute) in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Company shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interest hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder. (j) The Company will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Company in the ordinary course of business), sell (except Inventory in the ordinary course) or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party. (k) The Company shall keep and preserve its Equipment, Inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage. (l) The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein. (m) The Company shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and -5- assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, the execution and delivery of a separate security agreement with respect to the Company's intellectual property ("INTELLECTUAL PROPERTY SECURITY AGREEMENT") in which the Secured Party has been granted a security interest hereunder, substantially in a form acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof. (n) The Company shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time. (o) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (p) The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. (q) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date furnished. (r) SCHEDULE A, attached hereto contains a list of all of the subsidiaries of Premier. 4. DEFAULTS. The following events shall be "EVENTS OF DEFAULT": (a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures; (b) Any representation or warranty of the Company in this Agreement or in the Intellectual Property Security Agreement shall prove to have been incorrect in any material respect when made; (c) The failure by the Company to observe or perform any of its obligations hereunder or in the Intellectual Property Security Agreement for ten (10) days after receipt by the Company of notice of such failure from the Secured Party; and (d) Any breach or default under the Warrants. -6- 5. DUTY TO HOLD IN TRUST. Upon the occurrence of any Event of Default and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. 6. RIGHTS AND REMEDIES UPON DEFAULT. Upon occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debentures and the Warrants, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then located). Without limitation, the Secured Party shall have the following rights and powers: (a) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company's premises or elsewhere, and make available to the Secured Party, without rent, all of the Company's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form. (b) The Secured Party shall have the right to operate the business of the Company using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released. 7. APPLICATIONS OF PROCEEDS. The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party -7- shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, secured parties signatory hereto will be entitled to their pro rata portion of such proceeds (determined by reference to the aggregate principal amount of Debentures outstanding, determined on a cumulative basis), and the Company will be liable for the deficiency, together with interest thereon, at the rate of 17% per annum (the "Default Rate"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. 8. COSTS AND EXPENSES. The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate. 9. RESPONSIBILITY FOR COLLATERAL. The Company assumes all liabilities and responsibility in connection with all Collateral, and the obligations of the Company hereunder or under the Debentures and the Warrants shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 10. SECURITY INTEREST ABSOLUTE. All rights of the Secured Party and all Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, the Warrants or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, the Warrants or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and -8- performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 11. TERM OF AGREEMENT AND SUBORDINATION OF SECURITY INTEREST. (a) This Agreement and the Security Interest shall terminate on the earlier of (A) subject to the provisions of the immediately following sentence, the date of the receipt by the Secured Party of evidence satisfactory to it that the Company has received a minimum of $4,000,000 in bona fide funds from a Qualified Income Source which shall not be subject to repayment prior to the later to occur of (i) the 364th calendar day following the obtainment of such funds and (ii) the 270th day following the date that an Underlying Shares Registration Statement (as defined in the Debentures) is first declared effective by the Securities and Exchange Commission, and (B) the date on which all payments under the Debentures have been made in full and all other Obligations have been paid or discharged. Notwithstanding the foregoing and anything to the contrary contained herein, in no event shall this Agreement or the Security Interest terminate prior to the date that an Underlying Shares Registration Statement is first declared effective by the Securities and Exchange Commission. (b) If the Company shall have entered into a Qualified Facility for in excess of $500,000, then the Security Interest shall, subject to terms mutually acceptable to the Company and the Secured Party, become subordinate to any security interest granted to such lender pursuant to such Qualified Facility. (c) Upon any termination or subordination of the Security Interest pursuant to this Section 11, the Secured Party, at the request and at the expense of the Company, will join in executing an appropriate amendment or termination statement (as the case may be) with respect to any financing statement executed and filed pursuant to this Agreement. 12. POWER OF ATTORNEY; FURTHER ASSURANCES. (a) The Company authorizes the Secured Party, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Company's true and lawful attorney-in-fact, with power, in its own name or in the name of the Company, to, after the occurrence and during -9- the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the Company's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement, the Debentures and the Warrants all as fully and effectually as the Company might or could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding, subject to termination under Section 11. (b) On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on SCHEDULE B, attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Collateral. (c) The Company hereby irrevocably appoints the Secured Party as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law. 13. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses: -10- If to the Company: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92618 Facsimile No.: (949) 859-5241 Attn: Chief Financial Officer With copies to: Rutan & Tucker LLP 611 Anton Boulevard, 14th floor Costa Mesa, CA 92626-1998 Facsimile No.: (714) 546-9035 Attn: Thomas G. Brockington, Esq. If to the Secured Party, to the address set forth below such Secured Party's name on the signatures pages hereto. 14. OTHER SECURITY. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 15. ACTIONS BY THE SECURED PARTY. Any action required or permitted hereunder to be taken by or on behalf of the secured parties signatory hereto shall, for such action to be valid, require the approval of the Two Thirds-in-Interest prior to the taking of such action. If the consent, approval or disapproval of the secured parties signatory hereto is required or permitted pursuant to this Agreement, such consent, approval or disapproval shall only be valid if given by the Two Thirds-in-Interest. 16. MISCELLANEOUS. (a) No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto. -11- (d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submit to the exclusive jurisdiction of any New York State or United States Federal court sitting in Manhattan county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non convenient. (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR -12- EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVED ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. * * * * * * * * * * * -13- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN ------------------------------------- Name: Colette Cozean Title: CEO SECURED PARTIES: STRONG RIVER INVESTMENTS, INC. By: /s/ KENNETH L.HENDERSON ------------------------------------- Kenneth L. Henderson Attornye-in-Fact Strong River Investments, Inc. c/o Cavallo Capital Corp. 630 Fifth Avenue, Suite 2000 New York, NY 10111 Facsimile No.: (212) 332-3256 Attn: Avi Vigder HERKIMER LLC By: /s/ L. FAMINGTON /S/ JUDITH PATRICK ------------------------------------- Name: CTC Corporation Ltd. Title: Director Address for Notice: c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands -14- British West Indies Facsimile No.: (345) 945-7566 with a copy to: Southridge Capital Management LLC Executive Pavillon 20 Grove Street Ridgefield, CT 06877 Facsimile No.: (203) 431-8301 -15- SCHEDULE A TO SECURITY AGREEMENT Places where books of account, records and Collateral is located - ---------------------------------------------------------------- 1. 3 Morgan, Irvine, California 92618 (Executive Offices) Subsidiaries - ------------ 1. EyeSys - Premier Inc., a Delaware corporation. 100% owned 2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation (Premier Laser Systems, Inc. is the sole member.) 3. Data.Site, LLC, a California limited liability company (51% owned by Premier Laser Systems, Inc., now in the process of being shut down). 4. Ophthalmic Imaging Systems, a California corporation (51% owned by Premier Laser Systems, Inc.) -16- SCHEDULE B TO SECURITY AGREEMENT Jurisdictions where UCC-1 filings required - ------------------------------------------ 1. California Secretary of State -17- SCHEDULE 1(f) TO SECURITY AGREEMENT Premier Laser Systems vs. Infrared Fiber Systems, Inc, Coherent, Inc., et al, as described in Item 3 to Annual Report on Form 10-K of Premier Laser Systems for the fiscal year ended March 31, 1998 -18- SCHEDULE 3(c) TO SECURITY AGREEMENT Ownership of Collateral - ----------------------- 1. Under Agreement dated January 9, 1998 with Corneal Contouring Development, LLC ("CCD"), PLS may be obligated to return technology relating to a corneal reprofiling device, if certain conditions are not met. This device is not presently marketed by PLS. CCD has a security interest in the assets pertaining to this product. 2. Under Agreement dated August 28, 1998 with Wound Healing of Oklahoma, Inc. PLS may be obligated to return technology relating to a device for lowering the intraocular pressure of the eye, if certain conditions are not met. This device is not presently marketed by PLS. 3. Under a Technology Transfer and Software License Agreement dated October 16, 1998 among Premier Laser Systems, Inc., Sarver and Associates, Inc. and Edwin Sarver, PLS may be required to return technology relating to mapping of the eye. This device is not presently marketed by PLS. 4. Security interest in favor of Marine National Bank, covering computer equipment and molds. 5. Joint ownership of patent for laser tip, with Michael Colvard. -19- SCHEDULE 3(d) TO SECURITY AGREEMENT CURRENT MATTERS 1. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF, V. INTERDENT, INC., A CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC. A CALIFORNIA CORPORATION. This is a patent infringement case filed 09/22/97 regarding a laser method for bleaching teeth. 2. Opposition against Premier Laser Systems application in the Patent and Trademark Office to registration of the trademark "Aurora," and objection to the further use of that name by Premier Laser Systems in connection with the sale of its products. OLD MATTERS WHICH MAY NO LONGER BE IN DISPUTE 3. Dr. Pelagalli: Letter alleging that he is an inventor of certain (unspecified) technology of Premier Laser. 4. Dr. Patricia Bath: Letter alleging that Premier infringes a patent. 5. Opticon: Letter alleging that Premier infringes a patent. 6. Dr. Rabinowitz: Letter alleging that Premier infringes copyright. 7. Dr. Berlin: Letter to his lawyer (not to Premier) alleging that Premier infringes a patent. -20- EX-10.33 7 6% SECURED CONVERTIBLE DEBENTURE NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. No. 1 $2,000,000 PREMIER LASER SYSTEMS, INC. 6% SECURED CONVERTIBLE DEBENTURE DUE MAY 17, 2002 THIS DEBENTURE is one of a series of duly authorized and issued debentures of Premier Laser Systems, Inc., a California corporation, having a principal place of business at 3 Morgan, Irvine, California 92618 (the "COMPANY"), designated as its 6% Secured Convertible Debentures, due May 17, 2002, in the aggregate principal amount of $4,000,000 (the "DEBENTURES"). FOR VALUE RECEIVED, the Company promises to pay to [ ], or its registered assigns (the "HOLDER"), the principal sum of Two Million Dollars ($2,000,000), on May 17, 2002 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the "MATURITY DATE") and to pay interest to the Holder on such principal sum at the rate of 6% per annum, payable on a quarterly basis on March 31, June 30, September 30 and December 31 of each year while such Debentures are outstanding (each an "INTEREST PAYMENT DATE") and on each Conversion Date (as defined herein) for such principal amount, commencing on the earlier to occur of a Conversion Date for such principal amount and June 30, 1999, in cash or shares of Common Stock (as defined in Section 7). Subject to the terms and conditions herein, the decision whether to pay interest hereunder in Common Stock or cash shall be at the discretion of the Company. Interest shall accrue daily commencing on the Original Issue Date (as defined in Section 7) until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Any interest not paid on any Interest Payment Date shall continue to accrue and shall be due and payable upon conversion of the Debentures. Interest hereunder will be paid to the Person (as defined in Section 7) in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "DEBENTURE REGISTER"). All overdue accrued and unpaid interest shall entail a late fee at the rate of 15% per annum (to accrue daily, from the date such interest is due hereunder through and including the date of payment), payable in cash. Not less than ten (10) Trading Days (as defined in Section 7) prior to an Interest Payment Date, the Company shall provide the Holder notice of its intention to pay interest in cash or shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). If interest is paid in shares of Common Stock, the number of shares of Common Stock issuable on account of such interest shall equal the cash amount of such interest on such Interest Payment Date or Conversion Date (as applicable) divided by the Conversion Price (as defined below) on such date. Notwithstanding anything to contrary set forth herein, for purposes of determining the number of shares of Common Stock that are issuable as payment of interest hereunder, the Conversion Price shall not be subject to any Floor to which the Conversion Price would otherwise be subject. Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of interest on the principal amount if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to pay interest hereunder in shares of Common Stock; (ii) after the Interest Effectiveness Date (as defined in Section 7) such shares (x) are not registered for resale pursuant to an effective Underlying Shares Registration Statement (as defined in Section 7) and (y) may not be sold without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act (as defined in Section 7), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent in the form and substance acceptable to the applicable Holder and such transfer agent (if the Company is permitted and elects to pay interest in shares of Common Stock under this clause (ii) prior to the Interest Effectiveness Date and thereafter an Underlying Shares Registration Statement shall be declared effective by the Commission (as defined in Section 7), the Company shall, within three (3) Trading Days after the date of such declaration of effectiveness, exchange such shares for shares of Common Stock that are free of restrictive legends of any kind); (iii) such shares are not listed or quoted on the Nasdaq National Market ("NASDAQ") or on the New York Stock Exchange, American Stock Exchange or the Nasdaq SmallCap Market (each, a "SUBSEQUENT MARKET"); (iv) the Company has failed to timely satisfy its conversion obligations hereunder; or (v) the issuance of such shares would result in a violation of Section 4(a)(ii)(A). -2- This Debenture is subject to the following additional provisions: SECTION 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. SECTION 2. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement (as defined in Section 7) and may be transferred or exchanged only in compliance with the Purchase Agreement. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person (as defined in Section 7) in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. SECTION 3. EVENTS OF DEFAULT. (a) "EVENT OF DEFAULT", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment of the principal of, interest on or liquidated damages in respect of, any Debentures, free of any claim of subordination except in accordance with a subordination agreement executed by the Holder, as and when the same shall become due and payable (whether on the applicable Interest Payment Date, a Conversion Date or the Maturity Date or by acceleration or otherwise); (ii) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of any of, any Debenture, the Purchase Agreement, the Registration Rights Agreement (as defined in Section 7) or either of the Security Agreements (as defined in Section 7), and such failure or breach shall not have been remedied within 10 days after the date on which notice of such failure or breach shall have been given; (iii) the Company or any of its subsidiaries (for purposes of this subsection (iii), "subsidiary" shall mean a subsidiary of the Company representing 5% or more of the consolidated revenues of the Company and its consolidated subsidiaries for the last fiscal year of the Company prior to any of the events contemplated in this paragraph) shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, -3- insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; (iv) the Company shall default in any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company in an amount exceeding one hundred thousand dollars ($100,000), whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; (v) the Common Stock shall be either delisted from the NASDAQ or suspended from trading on the NASDAQ without resuming trading and/or being relisted thereon or on a Subsequent Market or having such suspension lifted for five (5) consecutive Trading Days or eight (8) Trading Days in the aggregate (which need not be consecutive days); (vi) the Company shall be a party to any Change of Control Transaction (as defined in Section 7), shall agree to sell or dispose all or in excess of 50% of its assets in one or more transactions (whether or not such sale would constitute a Change of Control Transaction), or shall redeem or repurchase more than a de minimis number of shares of Common Stock or other equity securities of the Company (other than redemptions of Underlying Shares (as defined in Section 7)); (vii) an Underlying Shares Registration Statement shall not have been declared effective by the Commission on or prior to the 30th day after the Effectiveness Date (as defined in the Registration Rights Agreement); -4- (viii) if, during the Effectiveness Period, the effectiveness of the Underlying Shares Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities under the Underlying Shares Registration Statement, in either case, for more than five (5) consecutive Trading Days or an aggregate of eight (8) Trading Days (which need not be consecutive days); (ix) an Event (as hereinafter defined) shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty (30) days from the Event Date (as defined below) relating thereto (other than an Event resulting from a failure of an Underlying Shares Registration Statement to be declared effective by the Commission on or prior to the Effectiveness Date, which shall be covered by Section 3(a)(vii)); (x) the Company shall fail for any reason to deliver certificates to a Holder prior to the twelfth (12th) day after a Conversion Date pursuant to and in accordance with Section 4(b) or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversions of any Debentures in accordance with the terms hereof; (xi) the Company shall fail for any reason to deliver the payment in cash pursuant to a Buy-In within seven (7) days after notice is deemed delivered hereunder; (xii) the Company shall issue in excess of an aggregate of 25,000 shares of Common Stock or shall issue Common Stock Equivalents (as defined herein) entitling the holders thereof to acquire in excess of an aggregate of 25,000 shares of Common Stock in connection with or to any present or future lender or creditor of the Company or any affiliate subsidiary thereof; (xiii) except for (a) the issuance of up to 2,250,000 shares of Common Stock in settlement of the litigation described in Schedule 2.1(g) to the Purchase Agreement and (b) the payment of up to an aggregate of $250,000 in cash, the Company shall agree to pay or settle any litigation or action for an amount in stock or cash that exceeds the insurance coverage for such litigation or claim; (xiv) the Company shall, without the consent of the Holders, restructure any material portion of its present or future debt obligations or payables (for purposes of this subsection, it is agreed that solely extending the time for repayment of debt in any such extensions whereby the aggregate annual rate of interest applicable to such debt (inclusive of the consideration, if any, for such extension), does not exceed the prime rate of interest then in effect as announced by The Chase Manhattan Bank, N.A. plus 3% shall not constitute a restructuring of debt); or -5- (xv) any of the Common Stock contemplated by clause (xiii) of this Section 3 shall be registered under the Securities Act or have registration rights (other than under Rule 144 promulgated under the Securities Act). (b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture (and, at the Holder's option, all other Debentures then held by such Holder), together with interest and other amounts owing in respect thereof, to the date of acceleration shall become, immediately due and payable in cash. The aggregate amount payable upon an Event of Default shall be equal to the sum of (i) the Mandatory Prepayment Amount (as defined in Section 7) plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions hereunder or as payment of interest hereunder, in either case, within thirty (30) days of the date of a declaration of an Event of Default and then held by the Holder and (B) the Per Share Market Value (as defined in Section 7) on the date prepayment is due or the date the full prepayment price is paid, whichever is greater. Interest shall accrue on the prepayment amount hereunder from the seventh day after such amount is due (being the date of an Event of Default) through the date of prepayment in full thereof at the rate of 15% per annum. All Debentures and Underlying Shares for which the full repayment price hereunder shall have been paid in accordance herewith shall promptly, and in any event within two (2) Business Days, be surrendered to or as directed by the Company. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. SECTION 4. CONVERSION. (a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time, after the Original Issue Date (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by dividing the outstanding principal amount of this Debenture to be converted, plus all accrued but unpaid interest thereon, by the Conversion Price. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted, together with the form of conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each Conversion Notice shall specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is deemed to have been delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be -6- effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to such Holder (in the manner and within the time set forth in Section 4(b)) a new Debenture for such principal amount as has not been converted. (ii) CERTAIN CONVERSION RESTRICTIONS (A)(1) A Holder may not convert Debentures or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the Holder, together with any affiliate thereof, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act (as defined in Section 7) and the rules promulgated thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, the Debentures held by such Holder after application of this Section. The Holder shall have the sole authority and obligation to determine whether the restriction contained in this Section applies and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of Debentures are convertible shall be in the sole discretion of the Holder. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company. Other Holders shall be unaffected by any such waiver. (2) A Holder may not convert Debentures or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the Holder, together with any affiliate thereof, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, the Debentures held by such Holder after application of this Section. The Holder shall have the sole authority and obligation to determine whether the restriction contained in this Section applies and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of Debentures are convertible shall be in the sole discretion of the Holder. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 75 days prior notice to the Company. Other Holders shall be unaffected by any such waiver. (B) If the Common Stock is then listed for trading on the NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the Shareholder Approval (as defined below), then the Company may not issue in excess of 2,992,287 shares of Common Stock upon conversions of Debentures or as payment of interest thereon in shares of Common Stock, which number shall be subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x) (such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals 19.999% of the number of shares of Common Stock outstanding immediately prior to the closing of transactions set forth in the Purchase Agreement. If on any Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the -7- aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all then outstanding Debentures and as payment of interest thereon in shares of Common Stock, together with any shares of Common Stock previously issued upon conversion of Debentures and as payment of interest thereon, would exceed the Issuable Maximum, and (C) the Company shall not have previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if any, as may be required by the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum pursuant to the terms hereof, then the Company shall issue to the Holder requesting a conversion a number of shares of Common Stock equal to the Issuable Maximum and, with respect to the remainder of the principal amount of Debentures then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of shares of Common Stock in excess of the Issuable Maximum (the "EXCESS PRINCIPAL"), the converting Holder shall have the option to require the Company to either (1) use its best efforts to obtain the Shareholder Approval applicable to such issuance as soon as is possible, but in any event not later than the 75th day after such request, or (2) pay cash to the converting Holder in an amount equal to the Mandatory Prepayment Amount for the Excess Principal. If the Company fails to pay the Mandatory Prepayment Amount in full pursuant to this Section, the Company will pay interest thereon at a rate of 15% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full. (b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (subject to the limitations set forth in Section 4(a)(ii) hereof), (ii) Debentures in a principal amount equal to the principal amount of Debentures not converted, (iii) a bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in cash), and (iv) if the Company has elected and is permitted hereunder to pay accrued interest in shares of Common Stock, certificates, which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement), representing such shares of Common Stock; PROVIDED, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of the principal amount of Debentures until Debentures are delivered for conversion to the Company, or the Holder notifies the Company that such Debentures have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, are not delivered to or as directed by the applicable Holder by the third (3rd) Trading Day after the -8- Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. (ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $5,000 for each Trading Day after such third (3rd) Trading Day until such certificates are delivered. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Debentures or as payment of interest thereon by the third (3rd) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue shares of Common Stock pursuant to Section 4(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such shares will be subject to the provision of this Section. (iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, by the third (3rd) Trading Day after the Conversion Date, and if after such third (3rd) Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the market price of the Common Stock at the time of the sale giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the market price of the Underlying Shares on the date of conversion was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. -9- Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In. (c) (i) The conversion price (the "CONVERSION PRICE") in effect on any Conversion Date shall be the lesser of (1) the lesser of (I) 3.135 and (II) the lowest exercise price of the Class B Warrants (as defined in Section 7) from and after the Closing Date under the Purchase Agreement (if the amount under this clause (II) shall have been decreased due to a decrease in the exercise price of the Class B Warrants and thereafter such exercise price shall be increased, the amount due under this clause (II) shall not be readjusted upwards and shall remain the lower amount) (the lower such amount, the "INITIAL CONVERSION PRICE") and (2) 90% of the average of the three (3) lowest Per Share Market Values during the twenty (20) Trading Days immediately preceding the applicable Conversion Date (which Trading Days may include Trading Days prior to the Original Issue Date), provided, that such twenty (20) Trading Day period shall be extended for the number of Trading Days during such period in which (A) trading in the Common Stock is suspended by the NASDAQ or a Subsequent Market on which the Common Stock is then listed, or (B) after the date declared effective by the Commission, the Underlying Shares Registration Statement is not effective, or (C) after the date declared effective by the Commission, the Prospectus included in the Underlying Shares Registration Statement may not be used by the Holder for the resale of Underlying Shares. Notwithstanding the foregoing, the Conversion Price shall not be less than the Floor (as defined in Section 7) for so long as the Floor remains in effect in accordance with Section 6; PROVIDED, that the Floor shall be subject to reduction due to operation of this Section 4(c). If (a) an Underlying Shares Registration Statement is not filed on or prior to the Filing Date (as defined under the Registration Rights Agreement) (if the Company files such Underlying Shares Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) of the Registration Rights Agreement, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Shares Registration Statement will not be "reviewed," or not subject to further review, or (c) the Underlying Shares Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date, or (d) such Underlying Shares Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities at any time prior to the expiration of the Effectiveness Period (as defined in the Registration Rights Agreement), without being succeeded within ten (10) days by an amendment to such Underlying Shares Registration Statement or by a subsequent Underlying Shares Registration Statement filed with and declared effective by the Commission, or (e) the Common Stock shall be delisted or suspended from trading on the NASDAQ or on any Subsequent Market for more than three (3) Business Days (which need not be consecutive days), (f) the conversion rights of the Holders are suspended for any reason (which shall not be triggered due to the operation of the restrictions set forth in Section 4(a)(ii) hereof), or (g) an amendment to the Underlying Shares Registration Statement is not filed by the Company with the Commission within ten (10) days of the Commission's notifying the Company that -10- such amendment is required in order for the Underlying Shares Registration Statement to be declared effective (any such failure or breach being referred to as an "EVENT," and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) day period is exceeded, or for purposes of clauses (d) and (g) the date which such 10 day-period is exceeded, or for purposes of clause (e) the date on which such three (3) Business Day-period is exceeded, being referred to as "EVENT DATE"), then, on the Event Date and on each monthly anniversary thereof until such time as the applicable Event is cured, the Company shall pay to the Holder 2.5% of the aggregate principal amount of the Debentures then outstanding in cash, as liquidated damages and not as penalty. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. (ii) If the Company, at any time while any Debentures are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any Debentures are outstanding, shall issue rights, options or warrants (other than the rights, options and warrants outstanding prior to the Original Issue Date and specified in Schedule 2.1(c) to the Purchase Agreement but not any modifications thereof) to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value at the record date mentioned below, then the Initial Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (plus the amounts payable on exercise of the corresponding options, warrants or rights) would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. However, upon the expiration of any such right, option or warrant to purchase shares of the Common Stock the -11- issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section, if any such right, option or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights, options or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights, options or warrants actually exercised. (iv) If the Company or any subsidiary thereof, as applicable with respect to Common Stock Equivalents (as defined below), at any time while Debentures are outstanding, shall issue shares of Common Stock or rights, warrants, options or other securities or debt (other than the rights, options and warrants outstanding prior to the Original Issue Date and specified in Schedule 2.1(c) to the Purchase Agreement but not any modifications thereof) that are convertible into or exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling any Person to acquire shares of Common Stock, in any case at a price per share less than the Conversion Price then in effect, then the Conversion Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such shares of Common Stock or such Common Stock Equivalents plus the number of shares of Common Stock which the offering price for such shares of Common Stock or Common Stock Equivalents (plus the amounts payable on exercise of the corresponding options, warrants or rights) would purchase at the Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock so issued or issuable, PROVIDED, that for purposes hereof, all shares of Common Stock that are issuable upon conversion, exercise or exchange of Common Stock Equivalents shall be deemed outstanding immediately after the issuance of such Common Stock Equivalents. Such adjustment shall be made whenever such shares of Common Stock or Common Stock Equivalents are issued. No adjustment shall be made under this Section 4(c)(iv) as a result of a lowering of the exercise price for the Class B Warrants or as a result of the issuance of up to 2,250,000 shares of Common Stock in connection with the litigation disclosed in Schedule 2.1(g) to the Purchase Agreement (but there will be an adjustment hereunder for any issuance in excess of such number of shares). However, upon the expiration of any Common Stock Equivalents the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section, if any such Common Stock Equivalents shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section after the issuance of such Common Stock Equivalents) had the adjustment of the Conversion Price made upon the issuance of such Common Stock Equivalents been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such Common Stock Equivalents actually exercised. -12- (v) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Initial Conversion Price at which Debentures shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, if the Holders of a majority in interest of the Debentures dispute such valuation, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "APPRAISER") selected in good faith by the holders of a majority in interest of Debentures then outstanding; and PROVIDED, FURTHER, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (vi) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders shall have the right thereafter to, at their option, (A) convert the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay the aggregate of its outstanding principal amount of Debentures, plus all interest and other amounts due and payable thereon, at a price determined in accordance with Section 3(b). The entire prepayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (vii) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. -13- (viii) Whenever the Initial Conversion Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (ix) If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (x) In case of any (1) merger or consolidation of the Company with or into another Person that would constitute a Change of Control Transaction, or (2) sale by the Company of more than one-half of the assets of the Company (on an as valued basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Company or another Person; then a Holder shall have the right to (A) if permitted under Section 3(b) hereof, exercise its rights of prepayment under Section 3(b) with respect to such event, (B) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such -14- aggregate principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sales would have been entitled, (C) in the case of a merger or consolidation, (x) require the surviving entity to issue convertible debentures in a principal amount equal to the aggregate principal amount of Debentures then held by such Holder, plus all accrued and unpaid interest and other amounts owing thereon, which newly issued debentures shall have terms identical (including with respect to conversion) to the terms of this Debenture and shall be entitled to all of the rights and privileges of a Holder of Debentures set forth herein and the agreements pursuant to which the Debentures were issued (including, without limitation, as such rights relate to the acquisition, transferability, registration and listing of such shares of stock other securities issuable upon conversion thereof), and (y) simultaneously with the issuance of such convertible debentures, shall have the right to convert such instrument only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation, or (D) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section, tender or exchange its aggregate principal amount of Debentures for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and such Holder shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted (taking into account all then accrued and unpaid interest) immediately prior to such tender or exchange would have been entitled as would have been issued. In the case of clause (C), the conversion price applicable for the newly issued convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as to continue to give the Holders of Debentures the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures and payment of interest on the Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Underlying Shares Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Underlying Shares Registration Statement. -15- (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Debentures hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 3 Morgan, Irvine, California 92618 (facsimile number (949) 859-5241), attention Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section, with a copy to Rutan & Tucker, LLP, 611 Anton Boulevard, Costa Mesa, CA 92626 (facsimile number (714) 546-9035), attention Thomas G. Brockington, Esq. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder of the Debentures at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. -16- SECTION 5. OPTIONAL PREPAYMENT. (a) The Company shall have the right, exercisable at any time and from time to time in accordance with the terms hereof, upon twenty (20) Trading Days prior written notice to the Holders of the Debentures to be prepaid and accompanied by any waiver required by holders of senior indebtedness of the Company for such prepayment (an "OPTIONAL PREPAYMENT NOTICE"), to prepay all or any portion of the outstanding principal amount of the Debentures which have not previously been repaid or for which Conversion Notices have not previously been delivered. The prepayment price applicable to prepayments under this Section 5(a) shall equal the Optional Prepayment Price (as defined in Section 7) and shall be paid in cash. Any such prepayment shall be free of any claim of subordination. The Company shall not be entitled to deliver an Optional Prepayment Notice to the Holders if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes is insufficient to satisfy the Company's conversion obligations of the aggregate principal amount of Debentures then outstanding, or (ii) there is neither an effective Underlying Shares Registration Statement under which the Holders can resell all of the issued Underlying Shares and all of the Underlying Shares as are issuable upon conversion in full of the principal amount of Debentures subject to prepayment under the Optional Prepayment Notice (which Underlying Shares Registration Statement must be effective through the applicable Optional Prepayment Date, as defined below) nor may all of such issued and issuable Underlying Shares be sold by the Holders subject to such prepayment without volume restrictions pursuant to Rule 144 promulgated under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent in the form and substance acceptable to the Holders and such transfer agent, or (iii) the Common Stock is not then listed for trading on the NASDAQ or on a Subsequent Market. The Holders shall have the right to tender, and the Company shall honor, Conversion Notices delivered prior to the expiration of the twentieth (20th) Trading Day after receipt by the Holders of an Optional Prepayment Notice for such Debentures (the 20th Trading Day after receipt by the Holders of an Optional Prepayment Notice is referred to herein as the "OPTIONAL PREPAYMENT DATE"). (b) The Company shall have the right to prepay up to 20% of the then outstanding principal amount of Debentures in any two consecutive month period at an Optional Prepayment Price equal to the Profit Sharing Prepayment Price (as defined in Section 7), but only if the Per Share Market Value for each of the twenty (20) consecutive Trading Days preceding the date of the Optional Prepayment Notice for which such prepayment price is sought is equal to or greater than 135% of the Initial Conversion Price. The provisions of Sections 5(a) and (c) relating to the other conditions and provisions governing prepayments shall apply to a prepayment seeking the pricing set forth in this Section 5(b). (c) If any portion of the Optional Prepayment Price shall not be paid by the Company by the second (2nd) Business Day following the Optional Prepayment Date, the Optional Prepayment Price shall be increased by 15% per annum (to accrue daily) until paid (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of the Optional Prepayment Price remains unpaid through the expiration of the Optional Prepayment Date, the Holder subject to such prepayment may elect by written -17- notice to the Company to either (x) demand conversion in accordance with the formula and the time period therefor set forth in Section 4 of any portion of the principal amount of Debentures for which the Optional Prepayment Price, plus accrued liquidated damages thereof, has not been paid in full (the "UNPAID PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per Share Market Value shall be the lower of the Per Share Market Value calculated on the Optional Prepayment Date and the Per Share Market Value as of the Holder's written demand for conversion, or (y) invalidate AB INITIO such optional redemption, notwithstanding anything herein contained to the contrary. If the Holder elects option (x) above, the Company shall within three (3) Trading Days after such election is deemed delivered hereunder to the Holder deliver the shares of Common Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject to such conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (y) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of notice of such election, return to the Holder new Debentures for the full Unpaid Prepayment Principal Amount. If, upon an election under option (x) above, the Company fails to deliver the shares of Common Stock issuable upon conversion of the Unpaid Prepayment Principal Amount within the time period set forth in this Section, the Company shall pay to the Holder in cash, as liquidated damages and not as a penalty, $2,500 per day until the Company delivers such Common Stock to the Holder. SECTION 6. MANDATORY PREPAYMENT/ELIMINATION OF FLOOR. (a) If the Conversion Price for twenty-one (21) consecutive days shall be equal to or below $1.50, the Holder may, at any time thereafter, deliver a notice to the Company (the "HOLDER NOTICE") requiring the Company to act in accordance with the immediately following sentence. Within three (3) Business Days after delivery of the Holder Notice under this Section 6(a), the Company shall notify the Holder of its election to either (i) prepay the entire outstanding principal amount of the Debentures which have not previously been repaid or for which Conversion Notices have not previously been delivered, together with interest and other amounts owed in respect thereof, at a price equal to the Mandatory Prepayment Price, no later than ten (10) Business Days from such election, or (ii) discontinue and remove permanently the Floor. The Company shall honor Conversion Notices delivered prior to the expiration of the three (3) Business Day period contemplated by this Section 6(a), provided, that such conversions shall be subject to the Floor. A failure of the Company to timely elect under this Section 6(a) shall be deemed an election to discontinue permanently the Floor. (b) If the Conversion Price for ten (10) consecutive Trading Days shall be equal to or less than $1.25, then the Holder may deliver a Holder Notice, requiring the Company to act in accordance with the immediately following sentence. Within three (3) Business Days after delivery of the Holder Notice under this Section 6(b), the Company shall notify the Holder of its election to either (i) prepay the entire outstanding principal amount of the Debentures which have not previously been repaid or for which Conversion Notices have not previously been delivered, together with interest and other amounts owed in respect thereof, at a price equal to the Mandatory Prepayment Price, no later than ten (10) Business Days from such election, or (ii) discontinue and -18- remove permanently the Floor. The Company shall honor Conversion Notices delivered prior to the expiration of the three (3) Business Day period contemplated by this Section 6(b), provided, that such conversions shall be subject to the Floor. A failure of the Company to timely elect under this Section 6(b) shall be deemed an election to discontinue permanently the Floor. SECTION 7. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of California are authorized or required by law or other government action to close. "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in excess of 40% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company's securities continue to hold at least 60% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). "CLASS B WARRANTS" means the Company's Class B Warrants, entitling the holders thereof to purchase 7,592,460 shares of Common Stock. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Class A Common Stock, no par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FLOOR" means the lower of (i) $1.50, and (ii) 80% of the lowest exercise price of the Class B Warrants from and after the Closing Date under the Purchase Agreement (if the amount under this subsection (ii) shall have been decreased due to a decrease in the exercise price of the Class B Warrants and thereafter such exercise price shall be increased, the amount due under this subsection (ii) shall not be readjusted upwards and shall remain the lower amount). However, if the Company shall issue the shares of Common Stock permitted by clause (a) of Section 3(a)(xiii) and the issuance or resale of any such shares shall be registered prior to the date that is 64 Trading Days after the date that an Underlying Shares Registration Statement is first declared -19- effective by the Commission (provided, that such 64 Trading Day period shall be extended for the number of Trading Days during such period in which (A) trading in the Common Stock is suspended by the NASDAQ or a Subsequent Market on which the Common Stock is then listed, or (B) after the date declared effective by the Commission, the Underlying Shares Registration Statement is not effective, or (C) after the date declared effective by the Commission, the Prospectus included in the Underlying Shares Registration Statement may not be used by the Holder for the resale of Underlying Shares), then the then applicable Floor shall be reduced by 10%. "INTEREST EFFECTIVENESS DATE" means the earlier to occur of (x) the Effectiveness Date and (y) the date that an Underlying Shares Registration Statement is declared effective by the Commission. "MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal the sum of (i) the greater of (A) 115% of the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the Per Share Market Value on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. "OPTIONAL PREPAYMENT PRICE" shall equal (A) the sum of (i) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion Price on (x) the Optional Prepayment Date or (y) the date the Optional Prepayment Price is paid in full, whichever is less, multiplied by the Per Share Market Value on (x) the Optional Prepayment Date or (y) the date the Optional Prepayment Price is paid in full, whichever is greater, and (ii) all other amounts, expenses, costs and liquidated damages due in respect of such Debentures, or (B) when applicable under Section 5(b), the Profit Sharing Prepayment Price. "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "PER SHARE MARKET VALUE" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or if there is no such price on such date, then the closing bid price on the NASDAQ or on such Subsequent Market on the date nearest preceding such date, or (b) if the Common Stock is not then listed or quoted on the NASDAQ or a Subsequent Market, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency -20- succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the Holders of a majority in interest of the principal amount of Debentures then outstanding. "PERSON" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "PROFIT SHARING PREPAYMENT PRICE" shall equal 115% of the principal amount of Debentures to be prepaid in accordance with Section 5(b), plus all accrued and unpaid interest thereon and all other amounts, expenses, costs and liquidated damages due in respect of such Debentures. "PURCHASE AGREEMENT" means the Secured Convertible Debenture Purchase Agreement, dated as of the Original Issue Date, between the Company and the original Holder of Debentures, as amended, modified or supplemented from time to time in accordance with its terms. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the Original Issue Date, between the Company and the original Holder of Debentures, as amended, modified or supplemented from time to time in accordance with its terms. "QUALIFIED FACILITY" means a credit facility or factoring arrangement with a nationally or regionally recognized institutional lender, whereby such lender has made available to the Company a minimum of $500,000 in a financing without conditions or restrictions (including with respect to borrowing base requirements) as to the availability of funds whereby such lender has required the Company to grant a first priority security interest in the collateral secured by the security interests granted pursuant to the Security Agreements. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITY AGREEMENTS" means collectively (i) the Security Agreement, dated as of the Original Issue Date between the Company and the original Holders of Debentures, as amended modified or supplemented from time to time in accordance with its terms, and (ii) the Intellectual Property Security Agreement dated as of the Original Issue Date between the Company and the original Holders of Debentures, amended modified or supplemented from time to time in accordance with its terms. "TRADING DAY" means (a) a day on which the Common Stock is traded on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common -21- Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "UNDERLYING SHARES" means the shares of Common Stock issuable upon conversion of Debentures or as payment of interest in accordance with the terms hereof. "UNDERLYING SHARES REGISTRATION STATEMENT" means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Underlying Shares and naming the Holder as a "selling stockholder" thereunder. SECTION 8. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks PARI PASSU with all other Debentures now or hereafter issued under the terms set forth herein. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. Except for debt issued under a Qualified Facility, the Company shall not issue any debt or other instrument which shall be pari passu with or senior to the Debentures in right of payment, whether with respect to interest or upon liquidation, dissolution or otherwise. SECTION 9. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. SECTION 10. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. SECTION 11. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. The Company and the Holders hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby -22- or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. SECTION 12. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. SECTION 13. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest due hereunder shall violate applicable laws governing usury, the applicable rate of interest due hereunder shall equal the maximum permitted rate of interest. SECTION 14. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. SECTION 15. The payment obligations under this Debenture and the obligations of the Company to the Holder arising upon the conversion of all or any of the Debentures in accordance with the provisions hereof are secured pursuant to the Security Agreements. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] -23- IN WITNESS WHEREOF, the Company has caused this Secured Convertible Debenture to be duly executed by a duly authorized officer as of the date first above indicated. PREMIER LASER SYSTEMS, INC. By: /S/ COLETTE COZEAN ------------------------------------- Name: Colette Cozean Title: CEO Attest: By: /S/ JUDITH A. McCALL -------------------------------- Name: Judith A. McCall Title: VP, HR & Admin. EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of Class A Common Stock, no par value per share (the "Common Stock"), of Premier Laser Systems, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ______________________________________________ Date to Effect Conversion ______________________________________________ Principal Amount of Debentures to be Converted ______________________________________________ Number of shares of Common Stock to be Issued ______________________________________________ Applicable Conversion Price ______________________________________________ Signature ______________________________________________ Name ______________________________________________ Address EX-23.1 8 CONSENT OF HASKELL & WHITE LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier Laser Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No. 333-27151) pertaining to the February 1996 Stock Option Plan of Premier Laser Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No. 333-48379) pertaining to the 1996 Stock Option Plan of Premier Laser Systems, Inc., and related Prospectus, and the Registration Statement (Form S-8 No. 333-29497) pertaining to the 1997 Stock Option Plan of Premier Laser Systems, Inc., and related Prospectus, of our report dated June 9, 1999, with respect to the consolidated financial statements and schedule of Premier Laser Systems, Inc., included in its Annual Report (Form 10-K) for the year ended March 31, 1999. HASKELL & WHITE LLP Newport Beach, California June 29, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 1 YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 888,767 0 1,342,917 0 5,797,054 8,610,197 1,473,420 0 19,275,930 9,972,996 0 0 0 99,894,096 (90,591,162) 19,275,930 13,971,085 13,971,085 13,405,182 13,405,182 26,802,380 0 0 (24,268,864) 0 (24,268,864) (4,692,082) 0 0 (28,960,946) (1.86) (1.86)
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